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                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549
                                 ------------
 
                                   FORM 10-K
 
(Mark One)
 
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
 
For the fiscal year ended December 31, 1998
 
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
 
Commission File Number 000-21755
 
                              MASTECH CORPORATION
            (Exact name of registrant as specified in its charter)
 
<TABLE>
<S>                                              <C>
                  PENNSYLVANIA                                      25-1802235
          (State or other jurisdiction                           (I.R.S. Employer
       of incorporation or organization)                       Identification No.)
 
                1004 McKee Road                                       15071
             Oakdale, Pennsylvania                                  (Zip Code)
    (Address of principal executive offices)
</TABLE>
 
      Registrant's telephone number, including area code: (412) 787-2100
 
Securities registered pursuant to Section 12(b) of the Act: None
 
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01
par value
 
Indicate by check mark whether the registrant (1) has filed all reports to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months, and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [_]
 
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of February 26, 1999 (based on the closing price of such stock
as reported by NASDAQ on such date) was $507,393,462.
 
The number of shares of the registrant's Common Stock, par value $.01 per
share, outstanding as of February 26, 1999 was 50,330,605 shares.
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in a definitive proxy or information
statements incorporated by reference in Part III of this form 10-K or any
amendment to this form 10-K [_]
 
                      Documents Incorporated By Reference
 
Portions of the Corporation's Proxy Statement, prepared for the Annual Meeting
of Shareholders scheduled for June 1, 1999, to be filed with the Commission
are incorporated by reference into Part III of this report.
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<PAGE>
 
                              MASTECH CORPORATION
 
                                 1998 FORM 10-K
 
                               TABLE OF CONTENTS
 
<TABLE>
<CAPTION>
                                                                            Page
                                                                            ----
 <C>      <S>                                                               <C>
                                       PART I
 Item 1.  Business.......................................................     3
 Item 2.  Properties.....................................................    14
 Item 3.  Legal Proceedings..............................................    14
 Item 4.  Submission of Matters to a Vote of Security Holders............    14
                                      PART II
            Market for Registrant's Common Equity and Related Stockholder
 Item 5.  Matters........................................................    15
 Item 6.  Selected Financial Data........................................    16
          Management's Discussion and Analysis of Financial Condition and
 Item 7.  Results of Operations..........................................    17
 Item 7A. Quantitative and Qualitative Disclosures About Market Risk.....    24
 Item 8.  Financial Statements and Supplementary Data....................    24
          Changes in and Disagreements with Accountants on Accounting and
 Item 9.  Financial Disclosure...........................................    48
                                      PART III
 Item 10. Directors and Executive Officers of Registrant.................    49
 Item 11. Executive Compensation.........................................    49
 Item 12. Security Ownership of Certain Beneficial Owners and Management.    49
 Item 13. Certain Relationships and Related Transactions.................    49
                                      PART IV
           Exhibits, Financial Statement Schedules and Reports on Form 8-
 Item 14. K..............................................................    50
</TABLE>
 
 
                                       2
<PAGE>
 
                                    PART I
 
ITEM 1. BUSINESS
 
(a) Summary
 
  Mastech Corporation, a Pennsylvania corporation, incorporated on November
12, 1996 is a worldwide provider of information technology ("IT") services to
large and medium-sized organizations. Mastech Systems, a Pennsylvania
corporation through which the business of the Company has been conducted since
its inception in July 1986, is an indirect, wholly owned subsidiary of Mastech
Corporation. Mastech Corporation, and its direct and indirect wholly owned
subsidiaries shall hereinafter be referred to as "Mastech" or the "Company".
 
  Mastech provides its clients with a single source for a broad range of
applications solutions and services, including client/server design and
development, software modernization services, enterprise resource planning
("ERP") package implementation services, E-Business solutions, customer
interaction management, applications maintenance outsourcing and Year 2000
services. These services are provided in a variety of computing environments
and use leading technologies, including client/server architectures, object-
oriented programming languages and tools, distributed database management
systems and the latest networking and communications technologies. To enhance
its services, Mastech has formed business alliances with leading software
companies such as Oracle, PeopleSoft, SAP, Siebel and Genesys. In addition,
the Company has developed its own proprietary methodologies and tools, under
the name SmartAPPS, that enhance the productivity of the Company's Year 2000
and other services.
 
(b) Financial Information
 
  The Company's management allocates business resources principally among
three business units; the U.S. Client Services group, the High Value Services
group and the International Client Services group. The financial results and
data applicable to each, as well as their financing requirements (if any) are
set forth in Item 7 "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Notes to Consolidated Financial
Statements. Other financial information about the operations of the Company
are found on pages 16 and 17 of this Form 10-K. Services rendered by the
Company's international offices are considered international operations. The
Company has no export revenues.
 
(c) Services
 
  Mastech provides its clients with a single source for a broad range of IT
applications solutions and services, including: (i) client/server design and
development; (ii) conversion/migration services; (iii) ERP package
implementation services; (iv) E-Business solutions; (v) applications
maintenance outsourcing; and (vi) Year 2000 services. These services are
provided in a variety of computing environments and use leading technologies
including client/server architectures, object-oriented programming languages
and tools, distributed database management systems, groupware and the latest
networking and communications technologies. In addition, the Company has
developed proprietary SmartAPPS methodologies and tools to enhance
productivity.
 
  The Company's revenues are derived from fees paid by clients for
professional services. Historically, a substantial majority of the Company's
projects have been client-managed. On client-managed projects, Mastech
provides professional services as a member of the project team on a time-and-
materials basis. The Company recognizes revenues on time-and-materials
projects as the services are performed. On Mastech-managed projects, Mastech
assumes responsibility for project management and bills the client on a time-
and-materials or fixed-price basis. Fixed-price contracts are recognized by
the percentage of completion method. Revenues generated through offshore
software development centers on U.S. client engagements are included in U.S.
revenues.
 
  The Project Control Office ("PCO"), located in the Company's headquarters,
provides project management oversight for all North American client
engagements. For offshore projects, the PCO is the point of contact
 
                                       3
<PAGE>
 
during client business hours, establishing a clear line of communication with
the project teams in India and the United States. Mastech uses a proprietary
Lotus Notes-based Global Project Tracking System to facilitate project
management and control. The Company also utilizes PC conferencing tools to
conduct "virtual" meetings.
 
  The Company offers many of its services through an existing offshore
software development center in Bangalore, India which is connected via secure,
high-speed satellite links to the Company's headquarters and client sites.
Mastech has increased its offshore capacity by developing additional offshore
software development centers in Pune and Madras, India. Offshore software
development offers clients certain advantages as compared to domestic
development, including: (i) significant cost savings; (ii) faster delivery, as
larger teams can be deployed; (iii) virtual 24-hour project schedules, due to
the time difference between North America and India; and (iv) improved access
to a large pool of IT professionals.
 
  The Company's services are described below:
 
<TABLE>
<CAPTION>
         METHODS/TOOLS                             SERVICES
-------------------------------  ---------------------------------------------
                     Client/Server Design and Development
<S>                              <C>
 . Languages: C/C++, Visual       . Project management
  Basic, Delphi SmallTalk, Java
 . Tools: Powerbuilder, Gupta,    . Requirements analysis and definition
  Developer/2000, Lotus Notes
 . DBMS/4GLs: Oracle, Informix,   . Evaluation and selection of applications
  Sybase, Unify, SQLServer         packages
 . GUI: Windows, Motif, X-        . Prototyping and re-use
  Windows, OpenLook
 . CASE Tools: Oracle*CASE, IEF,  . Data modeling, data warehousing
  Bachman
                                 . Applications systems design and development
                                 . Database design and administration
                                 . Systems development and implementation
                                 . Technology education and training
                             Conversion/Migration
 . SmartAPPS Methodology          . Project management
 and Automated Conversion Tools  . Automated tools development
                                 . User interface conversion
                                 . Code conversion and testing
                                 . Control language conversion
                                 . Data migration
                                 . Cutover and implementation
                          ERP Package Implementation
 . Oracle Applications            . Project planning
 . PeopleSoft                     . Customization
 . SAP R/3                        . Integration
 . Seibel                         . Migration
 . Genesys                        . Database design and administration
 . J.D. Edwards                   . Systems support
                                 . Training
                                 . Intranet/Extranet design and implementation
</TABLE>
 
                                       4
<PAGE>
 
<TABLE>
<CAPTION>
       METHODS/TOOLS                              SERVICES
---------------------------  --------------------------------------------------
<S>                          <C>
                             E-Business Solutions
 . SmartAPPS Net              . Intranet/Extranet design and implementation
 . Languages: Java,           . Consulting services
  Javascript, HTML, C++,
  CGI
 . Tools: NetDynamics,        . Enterprise Java application development
  ColdFusion, Net.Commerce,    and deployment
  MS interdevelopment
 . DBMS/4GLs: Oracle,         . Web-enablement of databases and legacy
  Sybase, Progress,            systems
  Informix, SQL Server
 . Methodologies: UML for
 Java,
 . JavaBeans Component
  Framework for Enterprise
  Java component
  development
                     Applications Maintenance Outsourcing
 . SmartAPPS Maintain         . Project planning
  Methodology and Tools
                             . Baseline assessment and service level definition
                             . Process enhancements
                             . Modifications/enhancements to functionality
                             . Interfaces and integration with new systems
                             . Configuration management
                             . Documentation and standardization
                             . Applications productivity improvement
                             . Trouble-shooting and problem resolution
                             . 24-hours, 7-days per week emergency support
                                  Year 2000
 . SmartAPPS 2000 Impact      . Impact analysis
  Assessment and Automated
  Conversion Tools
 . Viasoft                    . Project planning
 . Microfocus Revolve         . Year 2000 conversion
                             . Compliance testing and validation
                             . Cutover and implementation
</TABLE>
 
Additional Services--Education and Training
 
  Mastech's Education and Training Department provides employees with basic
and advanced courses in key technologies such as Oracle, PowerBuilder,
VisualBasic, Java and ERP packages including Oracle Applications, SAP, J.D.
Edwards, PeopleSoft, Siebel and Genesys. Mastech has expanded its training
programs and courseware to offer them to its clients as a distinct value-added
service. The Company has piloted this service with selected clients and has
received positive feedback.
 
Sales and Marketing
 
  Mastech sells its services to large and medium-sized organizations through a
sales force of approximately 150 professionals. Previously, the Company's
sales force was organized as four groups. To meet the needs of the marketplace
more effectively, the Company's sales force is currently organized into three
primary groups: (i) the U.S. Client Services group; (ii) the High Value
Services group; and (iii) the International Client Services group. Sales
directors and representatives in each group are highly incentivized to cross-
sell the services of other groups.
 
  The U.S. Client Services group is divided into geographic regions, each of
which is directed by a Manager or Regional Director. Each region includes
multiple new business development managers. These individuals use a
proprietary database of several thousand prospects to telemarket Mastech's
services nationally. The Company subsequently sends interested prospective
clients a written proposal providing information about the Company,
 
                                       5
<PAGE>
 
its approach and methodology, schedules, team members, pricing and terms.
Mastech leverages the mobility of its software professionals and its cost-
effective telephone selling model to service all areas of the United States.
Each geographic region also includes Corporate Account Managers who are
responsible for selling Mastech's services to existing clients. These
managers, Regional Directors and senior management meet frequently on a
direct, face-to-face basis with clients.
 
  The U.S. Client Services group also focuses on developing national and
global relationships with major systems integrators such as EDS, IBM, KPMG,
Ernst & Young and Oracle. Mastech assists these integrators in meeting their
customers' needs by providing specialized technical expertise and
complementary capabilities such as offshore development.
 
  The High Value Services group manages engagements and provides IT
professionals trained in ERP package implementation services. This group works
directly with end-user clients and also as partners with both the ERP software
vendors and systems integrators on teamed implementation efforts. This group
is also responsible for securing and managing Mastech-managed engagements and
Year 2000 services.
 
  The International Client Services group operates through offices in nine
different countries. Each office is supervised by a Country Manager and
supported by dedicated sales personnel that sell directly to new clients using
an approach similar to the Company's U.S. sales approach. Additionally, these
offices focus on leveraging Mastech's existing relationships with its U.S.-
based multinational clients. These relationships are particularly strong with
global systems integrators and often provide a foundation on which each of
Mastech's international offices can build.
 
  Mastech's marketing organization works closely with the sales organization
to constantly improve results by supporting it with market research to assist
in strategic planning and tactical decision making, trade show selection and
exhibit planning, marketing literature, advertising and public relations
support. The marketing organization develops messages and positioning for such
activities by analyzing market trends and competitors' activities.
 
Clients
 
  Substantially all of the Company's clients are large and medium-sized
organizations. During the year ended December 31, 1998, the Company provided
services to over 900 clients worldwide in a diverse range of industries. The
Company's strategy is to maximize its client retention rate and secure follow-
on engagements by providing high-quality services and client responsiveness. A
significant number of the Company's clients have selected Mastech on a
recurring basis to provide additional services.
 
  The Company is a preferred vendor for several large organizations, including
Associates Bancorp, Bank of America, EDS and IBM Year 2000 Global Services. As
a preferred vendor, the Company is one of a limited number of service
providers to these organizations, enabling it to sell its services more
effectively. The Company is aggressively pursuing additional preferred vendor
arrangements in order to obtain new or additional business from large and
medium-sized organizations. These contracts generally result in lower margins
due to negotiated discounts, but are expected to generate higher revenues with
lower selling costs.
 
 
                                       6
<PAGE>
 
  Organizations to which the Company has provided, or is providing, services
include:
 
<TABLE>
<CAPTION>
Consumer Products   Manufacturing   Telecommunications    Transportation
-----------------  ---------------- ------------------ ---------------------
<S>                <C>              <C>                <C>
  Philip Morris       Ford Motor         AirTouch      Carnival Cruise Lines
      Sears        General Electric     Ameritech         Royal Caribbean
    Wal-Mart           Hitachi             AT&T            Union Pacific
  Circuit City          Intel              MCI              J. B. Hunt
     K-Mart                           U.S. Cellular
     Kellogg                          America Online
     Gateway
</TABLE>
 
<TABLE>
<CAPTION>
                                        Financial                          Integrators &
      Health Care                       Services                              Vendors
------------------------             ---------------                       -------------
<S>                                  <C>                                   <C>
 Blue Cross/Blue Shield              Bank of America                        Cap Gemini
Kaiser Foundation Health                Citibank                                EDS
         Merck                        The Hartford                         Ernst & Young
                                       NationsBank                              IBM
                                                                              Oracle
                                                                            Sabre Group
                                                                              Unisys
</TABLE>
 
  During the year ended December 31, 1998, approximately 23% of the Company's
revenues were derived from its top five clients (EDS, IBM, General Electric,
Sabre Group and Unisys Corporation). EDS accounted for approximately 11% of
the Company's revenues for the year ended December 31, 1998.
 
Human Resources
 
  The Company's success depends in large part on its ability to attract,
develop, motivate and retain highly skilled IT professionals. The Company has
over 80 full-time employees dedicated to recruiting IT professionals and
managing its human resources. The Company recruits in a number of countries,
including India, the U.S., Canada, The U.K., Singapore, Australia, the
Philippines, Russia, Bulgaria, Brazil, Sri Lanka and South Africa. The Company
advertises in leading newspapers and trade magazines. In addition, the
Company's employees are a valuable recruiting tool and are actively involved
in referring new employees and screening candidates for new positions. Mastech
uses a standardized global selection process which includes interviews, tests
and reference checks.
 
  The Company's Resource Managers use a proprietary system to manage the
employees and candidates in the Company's talent pool. This system enables the
Company to quickly identify appropriate IT professionals for various client
engagements. This database, which currently holds profiles on several thousand
IT professionals, catalogs individual technical profiles and stores
information pertaining to each individual's location, availability, mobility
and other factors.
 
  The Company has a focused retention strategy that includes career planning,
training, benefits and an incentive plan. The Company's benefits package
includes Company-subsidized health insurance, group life insurance, a long-
term disability plan, Company-subsidized health club memberships and tuition
reimbursement. The Company intends to continue to use stock options as part of
its recruitment and retention strategy. The Company also has an extensive
training infrastructure. The Company's Education and Training Department
trains employees on a variety of platforms and helps them transition from
legacy to client/server skills by providing cross-platform training in new
technologies. The Company is implementing an intranet to allow its employees
to access its courseware and computer-based training modules via the Internet
so that the training is available to all employees worldwide at their
individual convenience and pace.
 
  Mastech's IT professionals typically have Master's or Bachelor's degrees in
Computer Science or another technical discipline and two to ten years of IT
experience. As of December 31, 1998, the Company had approximately 4,700
employees comprised of 4,000 IT professionals, 229 sales and recruiting
personnel and
 
                                       7
<PAGE>
 
approximately 500 general and administrative personnel. As of December 31,
1998, approximately 37% of the Company's worldwide workforce was working under
H-1B temporary work permits in the United States. See "Risk Factors--
Government Regulation of Immigration." In addition, the Company uses
independent contractors to support client engagements. As of December 31,
1998, the Company had approximately 800 independent contractors working on
client engagements.
 
Competition
 
  The IT services industry is highly competitive and served by numerous
national, regional and local firms, all of which are either existing or
potential competitors of the Company. Primary competitors include participants
from a variety of market segments, including "Big Five" accounting firms,
systems consulting and implementation firms, applications software firms,
service groups of computer equipment companies, general management consulting
firms, programming companies and temporary staffing firms. Many of these
competitors have substantially greater financial, technical and marketing
resources and greater name recognition than the Company. In addition, there is
a risk that clients may elect to increase their internal IT resources to
satisfy their applications solutions needs. The Company believes that the
principal competitive factors in the IT services industry include the range of
services offered, technical expertise, responsiveness to client needs, speed
in delivering IT solutions, quality of service and perceived value. The
Company believes that it competes favorably with respect to these factors.
 
Intellectual Property Rights
 
  The Company relies upon a combination of nondisclosure and other contractual
arrangements and trade secret, copyright and trademark laws to protect its
proprietary rights and the proprietary rights of third parties from whom the
Company licenses intellectual property. The Company enters into
confidentiality agreements with its employees and limits distribution of
proprietary information. There can be no assurance that the steps taken by the
Company in this regard will be adequate to deter misappropriation of
proprietary information or that the Company will be able to detect
unauthorized use and take appropriate steps to enforce its intellectual
property rights.
 
  Software developed by the Company in connection with a client engagement is
typically assigned to the client. In limited situations, the Company may
retain ownership or obtain a license from its client, which permits Mastech or
a third party to market the software for the joint benefit of the client and
Mastech or for the sole benefit of Mastech.
 
Recent Developments
 
  On January 29, 1999, the Company acquired Global Resource Management ("GRM")
of Jacksonville, Florida. GRM provides information technology consulting and
support services to large companies for mission-critical projects. The Company
has expertise in network support and industry-specific solutions in the
telecommunications, healthcare and insurance industries. GRM will continue its
operations in Jacksonville as part of Mastech's southeast operations, which
are headquartered in Atlanta.
 
  On January 9, 1999, the Company acquired Direct Resources Scotland Limited
of Edinburgh, Scotland, an IT services firm focusing on the financial services
industry. Direct Resources will be headquartered in Edinburgh as part of the
Company's European operations which are operated through Mastech's London
office.
 
  On January 4, 1999, the Company acquired all the issued and outstanding
capital stock of the Amber Group, an SAP services company which provides
integrated consulting, development, implementation and training. The
transaction was a stock purchase and will be accounted for as a pooling of
interests. The Amber Group works exclusively with SAP systems, helping its
clients achieve efficiency in financials, logistics, and human resources among
others.
 
  On October 26, 1998, the Company acquired International MIS, Inc. ("IMIS"),
a business and information technology consulting firm based in San Francisco,
California. IMIS provides the financial industry with high-level project
management and business analysis consulting services.
 
 
                                       8
<PAGE>
 
RISK FACTORS
 
Recruitment and Retention of IT Professionals
 
  The Company's business involves the delivery of professional services and is
labor-intensive. The Company's success depends upon its ability to attract,
develop, motivate and retain highly skilled IT professionals and project
managers, who possess the technical skills and experience necessary to deliver
the Company's services. Qualified IT professionals are in great demand
worldwide and are likely to remain a limited resource for the foreseeable
future. There can be no assurance that qualified IT professionals will
continue to be available to the Company in sufficient numbers, or that the
Company will be successful in retaining current or future employees. Failure
to attract or retain qualified IT professionals in sufficient numbers could
have a material adverse effect on the Company's business, operating results
and financial condition. Historically, the Company has done most of its
recruiting outside of the countries where the client work is performed.
Accordingly, any perception among the Company's IT professionals, whether or
not well founded, that the Company's ability to assist them in obtaining
temporary work visas and permanent residency status has been diminished, could
lead to significant employee attrition. In the first eight months of 1996, the
Company experienced a higher than normal rate of employee attrition because
the Company was experiencing delays in securing the first-stage approval for
permanent residency status for its foreign employees working in the U.S. This
attrition resulted in the Company incurring increased costs for IT
professionals and a reduction in its revenue growth. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Overview."
 
Government Regulation of Immigration
 
  The Company recruits its IT professionals on a global basis and, therefore,
must comply with the immigration laws in the countries in which it operates,
particularly the United States. As of December 31, 1998, approximately 37% of
the Company's worldwide workforce were working under H-1B temporary work
permits in the United States. Government regulation limits the number of new
H-1B permits that may be approved in a fiscal year. On October 22, 1998, the
"American Competitiveness and Workforce Improvement Act" was signed into law.
The H-1B annual quota for fiscal year 1999 was increased from 65,000 to
115,000. The quota for fiscal years 2000 and 2001 will be 115,000 and 107,500
respectively. If the Company is unable to obtain H-1B visas for its employees
in sufficient quantities or at a sufficient rate for a significant period of
time, the Company's business, operating results and financial condition could
be adversely affected.
 
Variability of Quarterly Operating Results
 
  The Company's revenues and operating results are subject to significant
variation from quarter to quarter depending on a number of factors, including
the timing and number of client projects commenced and completed during the
quarter, the number of working days in a quarter, employee hiring, attrition
and utilization rates and the mix of time-and-materials projects versus fixed-
price projects during the quarter. The Company recognizes revenues on time-
and-materials projects as the services are performed, while revenues on fixed-
price projects are recognized using the percentage of completion method.
Although fixed-price projects have not contributed significantly to revenues
and profitability to date, operating results may be adversely affected in the
future by cost overruns on fixed-price projects. Because a high percentage of
the Company's expenses are relatively fixed, variations in revenues may cause
significant variations in operating results. Additionally, the Company
periodically incurs cost increases due to both the hiring of new employees and
strategic investments in its infrastructure in anticipation of future
opportunities for revenue growth. No assurances can be given that quarterly
results will not fluctuate, causing a material adverse effect on the Company's
business and financial condition.
 
Increasing Significance of Non-U.S. Operations and Risks of International
Operations
 
  The Company's international consulting and offshore software development
operations are important elements of its growth strategy. The Company opened
offices in Canada and Singapore in 1995, Japan and the
 
                                       9
<PAGE>
 
U.K. in 1996, and Australia, the Netherlands and the Middle East during 1997.
During 1998, the Company opened offices in Switzerland and South Africa and
closed the office in the Middle East. These operations depend greatly upon
business, immigration and technology transfer laws in those countries, and
upon the continued development of technology infrastructure. There can be no
assurance that the Company's international operations will be profitable or
support the Company's growth strategy. The risks inherent in the Company's
international business activities include unexpected changes in regulatory
environments, foreign currency fluctuations, tariffs and other trade barriers,
difficulties in managing international operations and potential foreign tax
consequences, including repatriation of earnings and the burden of complying
with a wide variety of foreign laws and regulations. The failure of Mastech to
manage growth, attract and retain personnel, manage major development efforts,
profitably deliver services, or a significant interruption of the Company's
ability to transmit data via satellite, could have a material adverse impact
on the Company's ability to successfully maintain and develop its
international operations and could have a material adverse effect on the
Company's business, operating results and financial condition.
 
  Although the Company's ownership of a U.S. trademark registration covering
the service mark "Mastech" gives the Company the presumption of ownership in
the U.S. of the "Mastech" mark for the services identified in the
registration, there can be no assurance that the Company is entitled to use
the designation "Mastech" in all international operations and there is the
possibility that third parties have superior rights to the "Mastech" mark (or
similar marks) outside the U.S.
 
Exposure to Regulatory and General Economic Conditions in India
 
  A significant element of the Company's business strategy is to increase the
utilization of its offshore software development centers in India. Mastech has
utilized an offshore software development center in Bangalore for
approximately two years and has opened two more centers in Pune and Madras,
India during 1998. The Company also operates recruiting and training centers
in India. The Indian government exerts significant influence over its economy.
In the recent past, the Indian government has provided significant tax
incentives and relaxed certain regulatory restrictions in order to encourage
foreign investment in certain sectors of the economy, including the technology
industry. Certain of these benefits that directly affect the Company include,
among others, tax holidays (temporary exemptions from taxation on operating
income), liberalized import and export duties and preferential rules on
foreign investment and repatriation. To be eligible for certain of these tax
benefits, the Company must continue to meet certain conditions. A failure to
meet such conditions in the future could result in the cancellation of the
benefits. There can be no assurance that such tax benefits will be continued
in the future at their current levels. Changes in the business or regulatory
climate of India could have a material adverse effect on the Company's
business, operating results and financial condition.
 
  Although wage costs in India are significantly lower than in the U.S. and
elsewhere for comparably skilled IT professionals, wages in India are
increasing at a faster rate than in the U.S. In the past, India has
experienced significant inflation and shortages of foreign exchange, and has
been subject to civil unrest and acts of terrorism. Changes in inflation,
interest rates, taxation or other social, political, economic or diplomatic
developments affecting India in the future could have a material adverse
effect on the Company's business, operating results and financial condition.
 
Intense Competition
 
  The IT services industry is highly competitive and served by numerous
national, regional and local firms, all of which are either existing or
potential competitors of the Company. Primary competitors include participants
from a variety of market segments, including "Big Five" accounting firms,
systems consulting and implementation firms, applications software firms,
service groups of computer equipment companies, general management consulting
firms, programming companies and temporary staffing firms. Many of these
competitors have substantially greater financial, technical and marketing
resources and greater name recognition than the Company. There are relatively
few barriers to entry into the Company's markets and the Company may face
 
                                      10
<PAGE>
 
additional competition from new entrants into its markets. In addition, there
is a risk that clients may elect to increase their internal IT resources to
satisfy their applications solutions needs. Further, the IT services industry
is undergoing consolidation which may result in increasing pressure on
margins. These factors may limit the Company's ability to increase prices
commensurate with increases in compensation. There can be no assurance that
the Company will compete successfully with existing or new competitors.
 
Concentration of Revenues; Risk of Termination
 
  The Company has in the past derived, and may in the future derive, a
significant portion of its revenues from a relatively limited number of
clients. The Company's five largest clients represented approximately 23%, 24%
and 23% of revenues for the years ended December 31, 1998, 1997 and 1996,
respectively. EDS accounted for approximately 11%, 11% and 7% of the Company's
revenues for the years ended December 31, 1998, 1997 and 1996, respectively.
Most of the Company's projects are terminable by the client without penalty.
An unanticipated termination of a major project could result in the loss of
substantial anticipated revenues and could require the Company to maintain or
terminate a significant number of unassigned IT professionals, resulting in a
higher number of unassigned IT professionals and/or significant termination
expenses. The loss of any significant client or project could have a material
adverse effect on the Company's business, operating results and financial
condition.
 
Management of Growth
 
  The Company's business has experienced rapid growth over the years that
could strain the Company's managerial and other resources. Revenues have grown
to $390.9 million in 1998 from $97.5 million in 1994. The number of employees
(excluding independent contractors) has grown to over 4,700 as of December 31,
1998. The Company's continued growth depends on adding key managers,
increasing its international operations, adding service lines and growing its
offshore infrastructure. The Company has broadened its range of services to
include client/server design and development, software modernization services,
enterprise resource planning ("ERP") package implementation services, E-
Business solutions, customer interaction management, applications maintenance
outsourcing and Year 2000 services. The Company opened offices in Canada and
Singapore in 1995, Japan and the U.K. in 1996, and Dallas, Texas, Australia,
the Netherlands and the Middle East during 1997. During 1998, the Company
opened offices in Switzerland and South Africa and closed the office in the
Middle East. In addition, the Company's offshore software development center
in Bangalore has been operational for over two years and centers in Pune and
Madras, India became operational during 1998. Effective management of these
growth initiatives will require the Company to continue to improve its
operational, financial and other management processes and systems. The failure
to manage growth effectively could have a material adverse effect on the
Company's business, operating results and financial condition.
 
Rapid Technological Change; Dependence on New Solutions
 
  The IT services industry is characterized by rapid technological change,
evolving industry standards, changing client preferences and new product
introductions. The Company's success will depend in part on its ability to
develop IT solutions that keep pace with changes in the IT services industry.
There can be no assurance that the Company will be successful in addressing
these developments on a timely basis or that, if these developments are
addressed, the Company will be successful in the marketplace. In addition,
there can be no assurance that products or technologies developed by others
will not render the Company's services noncompetitive or obsolete. The
Company's failure to address these developments could have a material adverse
effect on the Company's business, operating results and financial condition.
 
  A significant number of organizations are attempting to migrate business
applications from a mainframe environment to advanced technologies, including
client/server architectures. As a result, the Company's ability to remain
competitive will be dependent on several factors, including its ability to
help existing employees maintain or develop mainframe skills and to train and
hire employees with skills in advanced technologies. The Company's failure to
hire, train and retain employees with such skills could have a material
adverse impact on the Company's business. The Company's ability to remain
competitive will also be dependent on its ability to
 
                                      11
<PAGE>
 
design and implement, in a timely and cost-effective manner, effective
transition strategies for clients moving from the mainframe environment to
client/server or other advanced architectures. The failure of the Company to
design and implement such transition strategies in a timely and cost-effective
manner could have a material adverse effect on the Company's business,
operating results and financial condition.
 
Dependence on Principals
 
  The success of the Company is highly dependent on the efforts and abilities
of Sunil Wadhwani and Ashok Trivedi, the Company's Co-Chairman and Chief
Executive Officer and the Company's Co-Chairman and President, respectively.
Although Messrs. Wadhwani and Trivedi have entered into employment agreements
containing noncompetition, nondisclosure and nonsolicitation covenants, these
contracts do not guarantee that they will continue their employment with the
Company or that such covenants will be enforceable. The loss of the services
of either of these key executives for any reason could have a material adverse
effect on the Company's business, operating results and financial condition.
 
Risk of Preferred Vendor Contracts
 
  The Company is a party to several "preferred vendor" contracts and is
seeking additional similar contracts in order to obtain new or additional
business from large or medium-sized clients. Clients enter into these
contracts to reduce the number of vendors and obtain better pricing in return
for a potential increase in the volume of business to the preferred vendor.
While these contracts are expected to generate higher volumes, they generally
result in lower margins. Although the Company attempts to lower costs to
maintain margins, there can be no assurance that the Company will be able to
sustain margins on such contracts. In addition, the failure to be designated a
preferred vendor, or the loss of such status, may preclude the Company from
providing services to existing or potential clients, except as a
subcontractor, which could have a material adverse effect on the Company's
business, operating results and financial condition.
 
Growth Through Business Combinations
 
  As an integral part of its business strategy, the Company intends to
continue to expand by acquiring information technology businesses. The Company
continuously evaluates potential business combinations and aggressively
pursues attractive transactions. From December 1997, through February 1999,
the Company completed seven business combinations. The success of this
strategy depends not only upon the Company's ability to identify and acquire
businesses on a cost-effective basis, but also upon its ability to integrate
acquired operations into its organization effectively, to retain and motivate
key personnel and to retain clients of acquired businesses. There can be no
assurance that the Company will be able to identify, acquire or profitably
manage additional businesses or successfully integrate any acquired businesses
into the Company without substantial expenses, delays or other operational or
financial problems. Further, acquisitions may involve a number of special
risks, including diversion of management's attention, failure to retain key
acquired personnel, unanticipated events or circumstances and legal
liabilities and amortization of acquired intangible assets, some or all of
which could have a material adverse effect on the Company's business,
operating results and financial condition. Client satisfaction or performance
problems at a single acquired firm could have a material adverse impact on the
reputation of the Company as a whole. In addition, there can be no assurance
that acquired businesses, if any, will achieve anticipated revenues and
earnings. Additionally, the Company experiences competition for business
combinations. The failure of the Company to manage its acquisition strategy
successfully could have a material adverse effect on the Company's business,
operating results and financial condition.
 
Intellectual Property Rights
 
  The Company's success depends in part upon certain methodologies and tools
it uses in designing, developing and implementing applications systems and
other proprietary intellectual property rights. The Company is also developing
proprietary conversion tools, specifically tools tailored to address the Year
2000 problem. The Company relies upon a combination of nondisclosure and other
contractual arrangements and trade secret, copyright and trademark laws to
protect its proprietary rights and the proprietary rights of third parties
from whom the Company licenses intellectual property. The Company enters into
confidentiality agreements with its employees
 
                                      12
<PAGE>
 
and limits distribution of proprietary information. There can be no assurance
that the steps taken by the Company in this regard will be adequate to deter
misappropriation of proprietary information or that the Company will be able
to detect unauthorized use and take appropriate steps to enforce its
intellectual property rights.
 
  Although the Company believes that its services do not infringe on the
intellectual property rights of others and that it has all rights necessary to
utilize the intellectual property employed in its business, the Company is
subject to the risk of litigation alleging infringement of third-party
intellectual property rights. Any such claims could require the Company to
spend significant sums in litigation, pay damages, develop non-infringing
intellectual property or acquire licenses to the intellectual property which
is the subject of asserted infringement.
 
Risks Associated With Year 2000 Services
 
  The Company earned approximately 10%, 7% and 3% of its revenues from Year
2000 engagements in the years ended December 31, 1998, 1997 and 1996,
respectively. During this period, many of the Company's clients have needed to
repair or replace their legacy systems because of Y2K issues. The Company
believes this has favorably impacted the demand for its services and products.
Mastech expects that the demand for its services related to the Y2K problem
will diminish significantly over time and will eventually disappear. The
Company also believes that as companies focus on Y2K issues, other less
critical projects have not been and may not be initiated or may be suspended.
Although the Company provides a broad range of information technology
services, Mastech believes that the reduction in demand for its services that
may result from these Y2K related factors could have an adverse impact on its
future financial performance.
 
Fixed-Price Projects
 
  The Company undertakes certain projects billed on a fixed-price basis, which
is distinguishable from the Company's principal method of billing on a time-
and-materials basis. The failure of the Company to complete such projects
within budget would expose the Company to risks associated with cost overruns,
which could have a material adverse effect on the Company's business,
operating results and financial condition.
 
Potential Liability to Clients
 
  Many of the Company's engagements involve projects that are critical to the
operations of its clients' businesses and provide benefits that may be
difficult to quantify. Although the Company attempts to contractually limit
its liability for damages arising from errors, mistakes, omissions or
negligent acts in rendering its services, there can be no assurance that its
attempts to limit liability will be successful. The Company's failure or
inability to meet a clients' expectations in the performance of its services
could result in a material adverse change to the client's operations and
therefore could give rise to claims against the Company or damage the
Company's reputation, adversely affecting its business, operating results and
financial condition.
 
Price Volatility
 
  The market price of the Company's Common Stock could be subject to
significant fluctuations in response to variations in quarterly operating
results, the Company's prospects, changes in earnings estimates by securities
analysts and by economic, financial and other factors and market conditions
that can effect the capital markets generally, the industry segment of which
the Company is a part, the Nasdaq National Market, including the level of, and
fluctuations in, the trading prices of stocks generally and sales of
substantial amounts of the Company's Common Stock in the market, or the
perception that such sales could occur, and by other events that are difficult
to predict and beyond the Company's control. In addition, the securities
markets have experienced significant price and volume fluctuations from time
to time in recent years that have often been unrelated or disproportionate to
the operating performance of particular companies. These broad fluctuations
may adversely affect the market price of the Company's Common Stock.
 
 
                                      13
<PAGE>
 
ITEM 2. PROPERTIES
 
  The Company leases 56,850 square feet of office space in the Pittsburgh
suburb of Oakdale, Pennsylvania which serves as its corporate headquarters.
The Company's senior management, administrative personnel, human resources and
sales and marketing functions are housed in this facility. This lease expires
on May 31, 2001 and provides for two additional options to extend the lease
for consecutive five-year terms. During the fourth quarter of 1998, the High
Value Services Division moved into its new offices located outside Pittsburgh,
Pennsylvania. This facility provides an additional 25,000 square feet of
office space. The lease term expires March 31, 2004. The Company is currently
exploring leasing additional space at its headquarters and at other locations.
The Company and its affiliates have sales offices located outside Dallas TX,
San Francisco CA, Atlanta GA, Hartford CT, New York, NY, Philadelphia, PA and
Raleigh, NC.
 
  The Company has sales offices in several countries in order to develop
business internationally. The Company and its affiliates currently lease
office space in the Netherlands, Canada, United Kingdom, Japan, Singapore,
Switzerland, Australia, India, and South Africa. These locations allow the
Company to respond quickly to the needs of its international clients and to
recruit qualified IT professionals in these markets.
 
  Mascot Systems leases approximately 4,500 square feet of office space on one
floor of an office building located in Bangalore, India. The lease has a ten-
year term expiring in February 2008, with a rent revision clause every March.
Mascot Systems also leases a 32,500-square-foot office building located in
Bangalore. This lease has a ten-year term expiring in October 2006.
Additionally, Mascot Systems leases approximately 9,000 square feet of space
for its facilities located in Bangalore and Chennai, India. The lease
agreement has a ten-year term expiring in February 2008, with a rent revision
clause every March.
 
  Scott Systems leases, for its training facilities, approximately 2,100
square feet of office space on one floor of an office building located in
Mumbai (Bombay, India). The leased space is divided into five separately owned
suites owned individually by the controlling shareholders. The lease expires
in March 2003. Scott Systems also leases 7,500 square feet of office space in
Pune, India. This lease expires in August 2007.
 
ITEM 3. LEGAL PROCEEDINGS
 
  Neither the Company nor any of its subsidiaries is a party to any litigation
that is expected to have a material adverse effect on the Company or its
business.
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
  There were no matters submitted to a vote of shareholders during the fourth
quarter of 1998.
 
                                      14
<PAGE>
 
                                    PART II
 
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
        MATTERS
 
  The Common Stock has been traded on the Nasdaq National Market under the
symbol MAST since December 17, 1996. The following table sets forth, for the
periods indicated, the range of high and low closing sale prices for the
Common Stock as reported on the Nasdaq National Market. The information
provided below has been restated to reflect the two-for-one stock split
(record date was close of business on Friday, March 27, 1998).
 
<TABLE>
<CAPTION>
                                                             High      Low
                                                             ----      ----
1998
----
<S>                                                          <C>       <C>
First Quarter............................................... $29 1/2   $15 15/16
Second Quarter.............................................. $29 29/32 $17 13/16
Third Quarter............................................... $29 1/8   $20 1/4
Fourth Quarter.............................................. $28 3/4   $16 3/8
<CAPTION>
1997
----
<S>                                                          <C>       <C>
First Quarter............................................... $10 15/16  $7 1/2
Second Quarter.............................................. $11 7/8    $5 3/4
Third Quarter............................................... $17 1/2   $11 3/16
Fourth Quarter.............................................. $17 7/16  $13 5/16
</TABLE>
 
  On February 26, 1999, the Company had 133 registered holders of record of
the Common Stock.
 
  The Company intends to retain earnings to fund growth and the operation of
its business, and therefore has not declared dividends during 1998 and 1997.
Additionally, the Company does not anticipate paying any cash dividends in the
foreseeable future. Future cash dividends, if any, will be at the discretion
of the Company's Board of Directors and will depend upon, among other things,
the Company's future operations and earnings, capital requirements and
surplus, general financial condition, contractual restrictions and such other
factors as the Board of Directors may deem relevant. The Company's ability to
pay dividends is subject to the requirement of its revolving credit facility
with PNC Bank, National Association that the Company satisfy certain financial
covenants. The Company distributed approximately $6.3 million of the proceeds
from the initial public offering to the controlling shareholders as part of
the S-corporation termination. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."
 
  In December 1996, Mastech completed the initial public offering of its
Common Stock (Registration Number 33-14169). The net proceeds to the Company
from the sale of the 3,400,000 pre-split shares of Common Stock offered by the
Company (after deducting underwriting discounts, commissions and offering
expenses paid by the Company) were approximately $45.6 million. The Company
submitted its initial Form SR for filing with the Securities and Exchange
Commission on March 20, 1997 reporting for the period from December 16, 1996
(the effective date of the Company's registration statement for its initial
public offering) through March 16, 1997. The following table reflects, as of
December 31, 1998, and for each of the previous quarterly periods an estimate
of the amount of net offering proceeds used by the Company and the purpose for
which they were used:
 
                                      15
<PAGE>
 
<TABLE>
<CAPTION>
                                                       (dollars in thousands)
                         12/31/96 3/31/97 6/30/97 9/30/97 12/31/97 3/31/98 6/30/98 9/30/98 12/31/98  Total
                         -------- ------- ------- ------- -------- ------- ------- ------- -------- -------
<S>                      <C>      <C>     <C>     <C>     <C>      <C>     <C>     <C>     <C>      <C>
Tax payments............   $ --   $3,000  $1,900  $2,800  $ 3,100  $2,300    $--     $--    $   --  $13,100
Other working capital
 item...................    820    2,180     950      --    3,900   1,200     --      --        --    9,050
                           ----   ------  ------  ------  -------  ------    ---     ---    ------  -------
Total working capital
 items..................    820    5,180   2,850   2,800    7,000   3,500     --      --        --   22,150
                           ====   ======  ======  ======  =======  ======    ===     ===    ======  =======
S-corporation dividend..     --       --   6,300      --       --      --     --      --        --    6,300
Subsidiary loans........     --       --      --   4,050       --   3,000     --      --        --    7,050
Acquisitions............     --       --      --      --    3,000      --     --      --     7,100   10,100
                           ----   ------  ------  ------  -------  ------    ---     ---    ------  -------
                           $820   $5,180  $9,150  $6,850  $10,000  $6,500    $--     $--    $7,100  $45,600
                           ====   ======  ======  ======  =======  ======    ===     ===    ======  =======
</TABLE>
 
ITEM 6. SELECTED FINANCIAL DATA
 
<TABLE>
<CAPTION>
                                         Year Ended December 31,
                             ---------------------------------------------------
                                 1998       1997       1996      1995      1994
                             ---------  ---------  --------- --------- ---------
                              (dollars in thousands, except per share data)
<S>                          <C>        <C>        <C>       <C>       <C>
Income Statement Data (1):
  Revenues..................  $390,871   $240,448   $162,939  $137,201  $97,531
  Gross profit..............   128,693     72,763     43,671    39,218   26,362
  Income from operations
   (2)......................    53,782     26,105     13,456    18,473   11,281
  Interest (income) expense,
   net......................    (3,321)    (1,193)       331       169      323
  Merger-related expenses
   (3)......................     3,212         --         --        --       --
  Income before income
   taxes....................    53,891     27,298     13,125    18,304   10,958
  Provision for income taxes
   (4)......................    20,459     11,231      4,136        --       --
                             ---------  ---------  --------- --------- --------
  Net income................ $  33,432  $  16,067  $   8,989 $  18,304 $ 10,958
                             =========  =========  ========= ========= ========
  Basic earnings per common
   share (5)................ $    0.68  $    0.36
                             =========  =========
  Diluted earnings per
   common share (5)......... $    0.67  $    0.35
                             =========  =========
  Pro forma income taxes
   (4)......................                           5,291     7,222    4,385
                                                   --------- --------- --------
  Pro forma net income (4)..                       $   3,698 $  11,082 $  6,573
                                                   ========= ========= ========
  Pro forma basic and
   diluted earnings per
   share (4) (5)............                       $    0.09 $    0.29 $   0.17
                                                   ========= ========= ========
  Basic average common
   shares (5)...............    48,997     45,251     39,194    38,130   38,130
  Diluted average common
   shares (5)...............    49,830     45,720     39,200    38,130   38,130
<CAPTION>
                                               December 31,
                             ---------------------------------------------------
                                 1998       1997       1996      1995      1994
                             ---------  ---------  --------- --------- ---------
<S>                          <C>        <C>        <C>       <C>       <C>
Balance Sheet Data:
  Cash and cash equivalents. $  36,455  $  82,924   $ 46,566 $   3,026 $  4,267
  Investments...............    47,153         --         --        --       --
  Working capital...........   130,191    110,928     48,625    14,068   13,524
  Total assets..............   215,781    162,060     89,038    36,143   31,648
  Total shareholders'
   equity...................   158,207    119,426     49,588    14,613   13,896
</TABLE>
--------
(1) Amounts presented above have been restated to reflect the Company's
    acquisition of all of the shares of Quantum Information Resources
    ("Quantum") in a business combination that was accounted for under the
    pooling-of-interests method.
 
 
                                      16
<PAGE>
 
(2) Income from operations for the year ended December 31, 1996 reflects a
    non-recurring charge of $875,000 incurred pursuant to an agreement with an
    executive to pay, as compensation for past services, an amount equal to
    the value of 109,200 shares of Common Stock at the initial public offering
    price of $7.50 per share. The Company has reflected this payment along
    with the applicable tax withholdings as a non-recurring charge. For the
    years ended December 31, 1997 and 1998, income from operations reflect
    non-recurring charges of $518,000 and $258,000, respectively, relating to
    the amortization of deferred compensation for this same executive.
 
(3) The Company incurred merger-related costs related to the acquisition of
    Quantum and charged these costs to expense during the second quarter of
    1998.
 
(4) The Company's S-corporation status terminated on December 16, 1996 in
    connection with the Company's initial public offering of Common Stock,
    thereby subjecting the Company's income to federal and state taxes at the
    corporate level. Pro forma net income and pro forma net income per share
    reflect federal and state taxes (assuming an approximate 40% effective tax
    rate) as if the Company had been taxed as a C-corporation for all periods
    presented. See Note 13 of Notes to Consolidated Financial Statements for
    information concerning the computation of pro forma net income per common
    share. In connection with the Company's conversion from S-corporation
    status to C-corporation status, the Company recorded a provision for
    income taxes of $3.9 million in the fourth quarter of 1996.
 
(5) In the fourth quarter of 1997, the Company adopted Statement of Financial
    Accounting Standards No. 128, "Earnings per Share." Earnings per share for
    the pro forma periods were not impacted by the adoption of this Statement.
    See Note 13 of Notes to Consolidated Financial Statements for information
    concerning the computation of basic and diluted earnings per common share.
 
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
        RESULTS OF OPERATIONS
 
  This Form 10-K contains certain "forward-looking statements" (statements
which are not historical facts) such as statements about future financial
performance, capital expenditures, liquidity sources and needs, the Year 2000
problem and certain other operations matters. Words or phrases denoting the
anticipated results of future events--such as "anticipate," "believe,"
"estimate," "expect," "will likely," "are expected to," "will continue,"
"project," and similar expressions that denote uncertainty--are intended to
identify such forward-looking statements. These forward-looking statements are
subject to several risks and uncertainties, and the Company's actual future
results may differ significantly from those stated in any forward-looking
statements. While it is impossible to identify each factor and event that
could affect the Company's results, variations in the Company's revenues and
operating results occur from time to time as a result of a number of factors,
such as the significance of client engagements commenced and completed during
a quarter or a year, the number of working days in a quarter or a year,
employee hiring, retention, and utilization rates, acceptance and
profitability of the Company's services in new territories, integration of
companies acquired, competition, general economic conditions and economic
conditions specific to the information technology industry, which are
discussed in this Form 10-K under the caption "Risk Factors". Many of these
factors are beyond the Company's ability to predict or control. As a result of
these and other factors, quarterly revenues and operating results are
difficult to forecast, and the Company may experience significant quarterly
and yearly variations in operating results.
 
Overview
 
  Mastech Corporation was incorporated in Pennsylvania on November 12, 1996.
Mastech Systems, a Pennsylvania corporation through which the business of the
Company has been conducted since its inception in July 1986, is an indirect,
wholly owned subsidiary of the Company. In December 1996, Mastech completed
the initial public offering of its Common Stock, and in December 1997,
completed a secondary offering of its Common Stock. Subsequent to the initial
public offering, Mascot Systems and Scott Systems, both of which are
corporations organized under the laws of India, became wholly owned
subsidiaries of Mastech Systems.
 
  Mastech's revenues are derived from fees paid by clients for professional
services. Historically, a substantial majority of the Company's projects have
been client-managed. On client-managed projects, Mastech provides
 
                                      17
<PAGE>
 
professional services as a member of the project team on a time-and-materials
basis. The Company recognizes revenues on time-and-materials projects as the
services are performed. On Mastech-managed projects, Mastech assumes
responsibility for project management and bills the client on a time-and-
materials or fixed-price basis. Revenues on fixed-price contracts are
recognized by the percentage of completion method. Revenues generated through
offshore software development centers on U.S. Client engagements are included
in U.S. revenues.
 
  Mastech's most significant cost is its personnel expense, which consists
primarily of salaries and benefits of the Company's billable personnel. The
number of information technology ("IT") professionals assigned to projects may
vary depending on the size and duration of each engagement. Moreover, project
terminations, completions and scheduling delays may result in periods when
personnel are not assigned to active projects. Mastech manages its personnel
costs by closely monitoring client needs and basing personnel increases on
specific project engagements. While the number of IT professionals may be
adjusted to reflect active projects, the Company must maintain a sufficient
number of professionals to respond to demand for the Company's services on
both existing projects and new engagements.
 
  The Company has incurred significant incremental expenses to help ensure
that the Company has both an adequate number of skilled IT professionals and
the infrastructure necessary to sustain the Company's growth. These
expenditures were incurred in connection with: (i) the development of
additional service offerings, including Year 2000 conversion services and ERP
package implementation services; (ii) the establishment of a recruiting
division to recruit IT professionals in the U.S. and worldwide; (iii) the
opening of foreign sales offices to provide better access to the global
market; (iv) the development of three offshore software development centers in
India; (v) the hiring of additional managers to support a larger organization;
(vi) the relocation of the Company's headquarters to larger, more efficient
office space; and (vii) the establishment of a training center to improve the
skill levels of new and current employees. While these expenses have increased
the Company's selling, general and administrative expenses, the Company
believes that the revenues expected to be derived as a result of these
expenditures have not yet been fully realized.
 
  Mastech sells its services to large and medium-sized organizations. The
Company's sales force is organized to meet the needs of the marketplace
through three primary groups: (i) the U.S. Client Services group; (ii) the
High Value Services group; and (iii) the International Client Services group.
 
  The U.S. Client Services group is divided into geographic regions, each of
which is directed by a Manager or Regional Director. Each region includes
multiple new business development managers. These individuals use a
proprietary database of several thousand prospects to telemarket Mastech's
services nationally. The Company subsequently sends interested prospective
clients a written proposal providing information about the Company, its
approach and methodology, schedules, team members, pricing and terms.
 
  The U.S. Client Services group also focuses on developing national and
global relationships with major systems integrators such as EDS, IBM, KPMG,
Ernst & Young and Oracle. Mastech assists these integrators in meeting their
customers' needs by providing specialized technical expertise and
complementary capabilities such as offshore development.
 
  The High Value Services group provides IT professionals trained in ERP
implementations, E-business consulting, network services, and Year 2000
services, in addition to managing engagements in the aforementioned services.
Additionally, this group provides services through offshore software
development centers which are connected via secure, high-speed satellite links
to the Company's headquarters and client sites. This group works directly with
the end-user clients and also partners with a wide array of software
companies, ranging from ERP to supply-chain and custom-interaction vendors,
and systems integrators on teamed implementation efforts.
 
  The International Client Services group operates through offices in nine
different countries. Each office is supervised by a Country Manager and
supported by dedicated sales personnel who sell directly to new clients
 
                                      18
<PAGE>
 
using an approach similar to the Company's U.S. sales approach. Additionally,
these offices focus on leveraging Mastech's existing relationships with its
U.S.-based multinational clients.
 
  Financial results for the years ended December 31, 1997 and 1996 have been
restated to reflect the acquisition of Quantum in a business combination that
was accounted for as a pooling of interests.
 
Results of Operations
 
  The following table sets forth, for the periods indicated, selected
statements of operations data as a percentage of revenues:
 
<TABLE>
<CAPTION>
                                                               Year Ended
                                                              December 31,
                                                            -------------------
                                                            1998   1997   1996
                                                            -----  -----  -----
<S>                                                         <C>    <C>    <C>
Revenues................................................... 100.0% 100.0% 100.0%
Cost of Revenues...........................................  67.1   69.7   73.2
                                                            -----  -----  -----
Gross Profit...............................................  32.9   30.3   26.8
Selling, general and administrative........................  19.1   19.2   18.0
Non-recurring charges......................................   0.1    0.2    0.5
                                                            -----  -----  -----
Income from operations.....................................  13.8   10.9    8.3
Interest (income) expense, net.............................  (0.8)  (0.5)   0.2
Merger-related expenses....................................   0.8     --     --
                                                            -----  -----  -----
Income before income taxes.................................  13.8   11.4    8.1
                                                            -----  -----  -----
Provision for income taxes.................................   5.2    4.7    2.5
                                                            -----  -----  -----
Net income.................................................   8.6%   6.7%   5.5%
                                                            =====  =====  =====
</TABLE>
--------
Note: Percentages may not add due to rounding.
 
1998 Compared to 1997
 
  Revenues. The Company's revenues increased 62.6%, or $150.4 million, to
$390.9 million in 1998 from $240.4 million in 1997. Of this growth in
revenues, the U.S. Client Services group, High Value Services group, and the
International Client Services group contributed $37.3 million, $81.1 million
and $32.0 million, respectively, to this increase. The increases in U.S.
Client Services group and High Value Services group can be attributed to
additional services provided to existing clients and continued market
penetration. The Company's client base grew to over 900 during 1998 from
approximately 600 in 1997. The increase in the International Client Services
group is primarily the result of increased market penetration in Australia and
Europe.
 
  Gross Profit. Gross profit consists of revenues less cost of revenues. Cost
of revenues consists primarily of salaries and employee benefits for billable
IT professionals and the associated travel and relocation costs of these
professionals, as well as the cost of the independent contractors used by the
Company. Gross profit increased 76.9% to $128.7 million in 1998 from $72.8
million in 1997. Gross profit as a percentage of revenues increased to 32.9%
in 1998 from 30.3% in 1997. The primary reason for the increase in gross
profits as a percentage of revenues was higher margins in the High Value
Services and U.S. Client Services groups. The number of IT professionals
(including independent contractors) used by the Company increased to over
4,800 as of December 31, 1998 from approximately 3,500 as of December 31,
1997.
 
  Selling, General and Administrative Expenses. Selling, general and
administrative expenses consist of costs associated with the Company's sales
and marketing efforts, executive management, finance and human resource
functions, facilities and telecommunication costs and other general overhead
expenses. Selling, general and administrative expenses increased 61.8%, or
$28.6 million, to $74.7 million in 1998 from $46.1 million in 1997. The
increase in selling, general and administrative expenses reflects the
Company's continued investment
 
                                      19
<PAGE>
 
in infrastructure and in the initiatives required to implement the Company's
marketing strategies. These costs include the development of additional
service offerings, the expansion of its global recruiting capabilities, the
opening of additional international offices, the establishment of training
centers and the continued expansion of its offshore software development
centers. As a percentage of revenues, selling, general and administrative
expenses remained relatively unchanged at 19.1% and 19.2% for 1998 and 1997,
respectively.
 
  Interest and Other (Income) Expense, Net. Other income was $3.3 million in
1998 compared to other income of $1.2 million in 1997. The increase of $2.1
million in other income was the result of increased interest income from
higher levels of interest bearing funds.
 
  Merger-related expenses. The Company incurred $3.2 million of merger-related
costs and expenses in connection with the Quantum acquisition during the year
ended December 31, 1998.
 
  Income taxes. Provision for income taxes was $20.5 million, or an effective
tax rate of 38% for the year ended December 31, 1998 compared to $11.2
million, or an effective tax rate of 41% for the year ended December 31, 1997.
The primary factors contributing to the reduction in the effective tax rate
included a reduction in state income taxes and foreign income taxes, tax-
exempt interest income generated by the Company's municipal bond portfolio and
the tax holiday for the Company's Indian operations, offset by the effect of
non-deductible one-time acquisition charges.
 
  Outlook. The Company believes that the IT services industry remains strong
and growth oriented. Furthermore, the Company believes that the breadth of the
services and solutions that it offers positions it to continue to increase its
revenues and operating profits in 1999. The Company anticipates that it will
experience a shift in the demand for certain of its services in 1999 as a
result of Year 2000 (Y2K) related factors. Although Y2K related projects
represented only 10% of Company revenues in 1998, the Company believes that as
customers focus on completing their Y2K readiness efforts in 1999, the demand
for other IT services may be affected. The Company believes that the
percentage of revenues derived from Y2K, has peaked and will continue to
decline, as a percentage of total revenues, in 1999. Reductions or shifts in
the timing or demand for Company services could result in fluctuations in the
Company's quarterly revenues or operating results and could result in
differences between actual and expected results.
 
1997 Compared to 1996
 
  Revenues. The Company's revenues increased 47.6%, or $77.5 million, to
$240.4 million in 1997 from $162.9 million in 1996. The U.S. Client Services
group, High Value Services group and the International Client Services group
contributed $16.9 million, $48.0 million and $12.6 million, respectively, to
this increase. The growth in U.S. Client Services and High Value Services was
primarily attributable to successful market penetration and additional
services provided to existing clients. International growth was primarily the
result of successful market penetration in Europe. Furthermore, in the first
eight months of 1996, the Company experienced a higher than normal rate of
employee attrition because the Company was experiencing delays in securing the
first stage approval for permanent residency status for some of its
professionals. This attrition resulted in increased costs for IT professionals
and reduced revenue growth during 1996.
 
  Gross Profit. Gross profit consists of revenues less cost of revenues. Cost
of revenues consists primarily of salaries and employee benefits for billable
IT professionals and the associated travel and relocation costs of these
professionals, as well as the cost of the independent contractors used by the
Company. Gross profit increased 66.6% to $72.8 million in 1997 from $43.7
million in 1996. Gross profit as a percentage of revenues increased to 30.3%
in 1997 from 26.8% in 1996. The primary reasons for the increase in gross
profits as a percentage of revenues were higher margins in the High Value
Services and U.S. Client Services groups.
 
  Selling, General and Administrative Expenses. Selling, general and
administrative expenses consist of costs associated with the Company's sales
and marketing efforts, executive management, finance and human resource
functions, facilities and telecommunication costs and other general overhead
expenses. Selling, general
 
                                      20
<PAGE>
 
and administrative expenses increased 57.3%, or $16.8 million, to $46.1
million in 1997 from $29.3 million in 1996. As a percentage of revenues,
selling, general and administrative expenses increased to 19.2% in 1997 from
18.0% in 1996.
 
  The increase in selling, general and administrative expenses reflects the
Company's continued investment in infrastructure and in the initiatives
required to implement the Company's marketing strategies. These costs include
the development of additional service offerings, the expansion of its global
recruiting capabilities, the opening of additional international offices, the
establishment of training centers and the continued expansion of its offshore
software development centers.
 
  Interest and Other (Income) Expense, Net. Other income was $1.2 million in
1997 compared to other expense of $331,000 in 1996. This increase in other
income was the result of increased interest income from the investment of the
net proceeds from the Company's public offerings of Common Stock. This
increase in interest income was, however, partially offset by an increase in
interest expense charged on borrowings outstanding under the Company's
revolving credit facilities, principally to support the Company's Indian
operations. These borrowings increased the Company's interest expense to
$858,000 in 1997 from $511,000 in 1996.
 
  Income taxes. Provision for income taxes was $11.2 million, or an effective
tax rate of 41% for the year ended December 31, 1997 compared to $4.1 million
in 1996. Due to the S- to C-corporation conversion, a comparison of 1997 with
1996 is not meaningful. The tax provision for 1996 is composed primarily of
the tax associated with the termination of the Company's Subchapter S-
corporation status at the time of the initial public offering in December
1996.
 
Liquidity and Capital Resources
 
  Effective December 3, 1998, the Company entered into a new $75.0 million
revolving credit facility with PNC Bank, National Association (the "Credit
Facility"). This Credit Facility bears interest at a rate per annum equal to a
base rate (which is adjusted by a change in the prime rate or the Federal
Funds Effective Rate at the Company's option) that is equal to the sum of the
Euro-rate plus an applicable Euro-rate margin. The Credit Facility contains
certain restrictive covenants and financial ratio requirements which would
limit distributions to shareholders and additional borrowings. There were no
borrowings outstanding under this arrangement as of December 31, 1998. This
Credit Facility replaced a previously existing $25.0 million revolving credit
facility also with PNC Bank, National Association. Average outstanding
borrowings under this arrangement were approximately $161,000 for the year
ended December 31, 1998.
 
  In December 1997, the Company completed the registration of 3,000,000 (pre-
split) shares of the Company's Common Stock for sale to the public. Of this
total, 1,800,000 (pre-split) shares were newly issued by the Company, and
1,200,000 (pre-split) shares were sold by selling shareholders. The Company
did not receive any part of the proceeds from the sale of shares by the
selling shareholders. The net proceeds to the Company of the offering were
approximately $51.3 million, after deducting underwriting discounts,
commissions and offering expenses paid by the Company. In addition, the net
proceeds to the Company, generated from Mastech's initial public offering in
December 1996, were approximately $45.6 million, after deducting underwriting
discounts and commissions and offering expenses paid by the Company.
 
  The Company has and will use these proceeds to develop new services, to
expand existing operations, including offshore software development
operations, for possible acquisitions of related businesses, and for general
corporate purposes, including working capital. Management currently
anticipates that the proceeds from these offerings together with the existing
sources of liquidity and cash generated from operations will be sufficient to
satisfy its existing cash needs at least through the next twelve months.
During 1997, the Company used the initial public offering proceeds to pay
approximately $900,000 of corporate income taxes related to the termination of
its status as an S-corporation. In April 1997, the Company also paid a
dividend of approximately $6.3 million of undistributed S-corporation earnings
due the controlling shareholders for the periods prior to Mastech becoming a
public company.
 
 
                                      21
<PAGE>
 
  Historically, the Company has financed its working capital requirements
through internally generated funds and with the proceeds from the
aforementioned offerings. The Company's financial statements reflect cash
flows provided by operations of approximately $35.1 million for 1998, cash
flows used by operations of $3.5 million for 1997, and cash flows provided by
operations of approximately $11.7 million for 1996. The Company's cash
provided by operations prior to the initial public offering does not reflect
any income tax expense due to the Company's prior status as an S-corporation.
Prior to the initial public offering, the Company made S-corporation
distributions to its shareholders and in 1997 made the final S-corporation
distributions.
 
  Cash used from investing activities of $77.7 million for the year ended
December 31, 1998 was primarily due to the net purchase of investments of
$47.3 million. These investments are classified as available-for-sale and
recorded at fair value. Additionally, the Company made several key
acquisitions during 1998 totaling $19.2 million.
 
  Capital expenditures for 1998, 1997 and 1996 were approximately $11.1
million, $5.9 million and $3.1 million, respectively. During 1998 and 1997,
the Company spent approximately $5.8 million and $2.8 million, respectively,
on computer and related equipment to support its technical, consulting and
administrative functions. The Company also spent approximately $3.4 million
and $1.3 million in 1998 and 1997, respectively, in connection with the
buildout and other development of the infrastructure for its offshore software
development and training facilities in India. During the next twelve months,
the Company expects to incur approximately $500,000 in remaining costs to
license and implement its new management information system. Of this amount, a
portion of the cost will be expensed.
 
  As of December 31, 1997, Mascot Systems had aggregate borrowings of
approximately $1.7 million outstanding under revolving credit agreements with
ICICI Banking Corporation Limited and IndusInd Bank Limited, both of India.
Interest rates charged on these borrowings ranged from 18.75% to 19.25% per
year. These borrowings were repaid in full by the Company in May 1998.
 
  The Company does not believe that inflation had a significant impact on the
Company's results of operations for the periods presented. On an ongoing
basis, the Company attempts to minimize any effects of inflation on its
operating results by controlling operating costs and, whenever possible,
seeking to ensure that billing rates reflect increases in costs due to
inflation.
 
  The Company invoices its clients in the local currency of the country in
which the client is located. Gains and losses as a result of fluctuations in
foreign currency exchange rates have not had a significant impact on results
of operations.
 
Recently Issued Accounting Standards
 
  Statement of Financial Accounting Standards No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits--an amendment of FASB
Statements No. 87, 88, and 106," revises employers' disclosures about pension
and other postretirement benefit plans. It does not change the measurement or
recognition of those plans. The Company currently has no pension benefit plans
for its employees, and as such will not be subject to the disclosure
requirements of this Statement.
 
  In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS No. 133"), which
establishes accounting and reporting standards for derivative instruments and
hedging activities. SFAS No. 133 is effective for periods after June 15, 1999.
Management does not anticipate that the adoption of this statement will have a
significant effect on the Company's financial position.
 
Other Matters
 
 Year 2000
 
  The Year 2000 ("Y2K") problem refers to problems which may occur because
some computer systems currently record years in a two-digit format. These
computer systems may have difficulty recognizing or
 
                                      22
<PAGE>
 
processing date information after December 31, 1999. The Y2K problem may also
occur with embedded chips. The Company has been working to evaluate the
potential effect of the Y2K problem on the Company's operations.
 
Internal Systems
 
  The Company developed a plan to evaluate its key internal computer systems.
The plan consisted of the following four phases: Inventory;
Evaluation/Assessment of Y2K Risk; Remediation and Testing. The Company has
completed all phases of evaluation for the internal financial and operational
systems located at the corporate headquarters of the Company. Based upon
written documentation and information available on vendor websites, certain
testing procedures for business critical hardware and software were developed
and implemented by the Company. An independent third party reviewed both
vendor information and testing results and conducted other tests to validate
work performed. As a result of this, the Company does not believe that the
internal computer systems at its corporate headquarters will experience
significant Y2K problems.
 
  The Company has also completed the evaluation of the internal financial and
operational systems of its other U.S. locations and international operations,
excluding certain systems involving operations of companies recently acquired
by the Company. The Company is currently evaluating the internal financial and
operational systems of the companies recently acquired and expects to complete
this evaluation by June 30, 1999.
 
Cost of Year 2000 Compliance Efforts
 
  The Company does not expect to incur substantial costs with respect to its
Y2K compliance efforts and the Company has not deferred other information
technology projects as a result of the Y2K problem. To date, the Company has
incurred expenses totaling $123,000 and anticipates that its total expenses
will not exceed $250,000 These figures are primarily reflective of the costs
associated with the use of third parties to review and validate work performed
and the costs assessing Y2K problems relating to or arising with respect to
third parties. The cost estimates do not include the cost of internal efforts
by Company personnel. The Company has not separately accounted for these
internal costs.
 
Third Party Relationships
 
  The Company has contacted its key vendors regarding their Y2K compliance
efforts. Although the Company has received some information from its vendors
regarding their Y2K compliance efforts, there can be no assurance that the
Company will not experience disruptions in its ability to conduct its business
because of Y2K problems experienced by the Company's vendors.
 
  In addition, the Company has contacted its key customers regarding their Y2K
compliance efforts. Although the Company has received some information from
its customers regarding their Y2K compliance efforts, there can be no
assurance that such customers will not experience disruptions in their
business which would result in material adverse affects to the Company. One
example of a worst case scenario would be a failure in the accounting systems
of a significant number of the Company's key clients due to the Y2K problem
that resulted in a delay in the payment of invoices issued by the Company for
services and expenses.
 
Potential Liability to Third Parties
 
  The Company has participated in Y2K remediation projects for some of its
customers. Although the Company has no reason to believe that any such work
will result in litigation against the Company, it is possible that the Company
could be materially adversely affected by litigation in connection with the
Y2K remediation services provided by the Company.
 
  The Company's policy has been to attempt to include provisions in client
contracts that, among other things, disclaim implied warranties, limit the
duration of express warranties, limit the Company's liability to
 
                                      23
<PAGE>
 
predetermined amounts, and disclaim any liability arising from third-party
software that is implemented, or installed by the Company. The Company also
maintains insurance to protect against potential liability in connection with
Y2K remediation services provided by the Company. There can be no assurance
that the Company will be able to obtain the desired contractual protections in
agreements or that any such contractual provisions will prevent clients from
asserting claims against the Company with respect to the Y2K issue. There also
can be no assurance that the contractual protections, if any, obtained by the
Company or the insurance coverage will operate to protect the Company from, or
adequately limit the amount of, any liability arising from claims asserted
against the Company.
 
Contingency Plan
 
  The Company is developing a contingency plan to address various situations
which may result if the Company experiences Y2K problems. The plan will
include identification of major systems, dependencies on third parties and
resources and strategies necessary to restore operations or work around
failures. It is expected that the contingency plan will be completed by April
30, 1999 and approved by the Board of Directors on June 1, 1999. There can be
no assurance that the contingency plan developed by the Company will
adequately protect the Company from internal Y2K problems or prevent service
interruption or failures experienced by customers and suppliers from having a
material adverse effect on the Company.
 
Demand for Year 2000 Services
 
  Many of the Company's clients have needed to repair or replace their legacy
systems because of Y2K issues. The Company believes this has favorably
impacted the demand for its services and products. Mastech expects that the
demand for its related Y2K problem will diminish significantly over time and
will eventually disappear. The Company also believes that as companies focus
on Y2K issues, other less critical projects have not been and may not be
initiated or may be suspended. Although the Company provides a broad range of
information technology services, Mastech believes that the reduction in demand
for its services that may result from these Y2K-related factors could have an
adverse impact on its future performance.
 
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
  On June 30, 1998, the Company entered into a foreign exchange contract with
PNC Bank, National Association to hedge its foreign exchange exposure on
certain intercompany debt. This contract matured on each of September 30, 1998
and December 31, 1998 and was extended for an additional three months each
time. The Company realized interim gains on the contract extensions at each of
September 30 and December 31. Gains or losses are recognized under hedge
accounting in Shareholder's Equity as Currency Translation Adjustment. Such
gains and losses are essentially offset in Currency Translation Adjustment by
gains or losses on the translation of the related debt. In December, the
contract was extended to March 31, 1999.
 
  The outstanding contract is the far end of a swap for the sale by the
Company of 7 million Canadian dollars at 1.54875 (US $4,519,774). It is the
intention of the Company to continue to extend the contract on a quarterly
basis until ultimate repayment of the intercompany loan. If the Canadian
dollar weakens resulting in a higher USD/CAD exchange rate than 1.54875 on
March 31, 1999, the Company will record an interim gain upon extension of the
contract. If the Canadian dollar strengthens resulting in a lower USD/CAD
exchange rate than 1.54875 on March 31, 1999, the Company will record an
interim loss upon extension of the contract. At December 31, 1998, the USD/CAD
exchange rate was 1.5303.
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
  The Financial Statements and Supplementary Data required by this item are
filed as part of this Form 10-K. See Index to Consolidated Financial
Statements on page 26 of this Form 10-K.
 
                                      24
<PAGE>
 
              MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
 
  The accompanying consolidated financial statements of Mastech Corporation
have been prepared by management, who is responsible for their integrity and
objectivity. The statements have been prepared in conformity with generally
accepted accounting principles and necessarily include amounts based on
management's best estimates and judgments.
 
  Management has established and maintains a system of internal controls
designed to provide reasonable assurance that assets are safeguarded and that
the Company's financial records reflect authorized transactions of the
Company. The system of internal controls includes widely communicated
statements of policies and business practices that are designed to require all
employees to maintain high ethical standards in the conduct of Company
affairs. The internal controls are augmented by organizational arrangements
that provide for appropriate delegation of authority and division of
responsibility.
 
  The Company's consolidated financial statements have been audited by Arthur
Andersen LLP, independent public accountants, whose report thereon appears on
page 27 of this Form 10-K. As part of its audit of the Company's 1998
financial statements, Arthur Andersen LLP considered the Company's system of
internal controls to the extent it deemed necessary to determine the nature,
timing and extent of its audit tests. Management has made available to Arthur
Andersen LLP the Company's financial records and related data.
 
  The Board of Directors pursues its responsibility for the Company's
financial reporting and accounting practices through its Audit Committee, a
majority of the members of which are independent directors. The Audit
Committee's duties include recommending to the Board of Directors the
independent public accountants to audit the Company's financial statements,
reviewing the scope and results of the independent public accountants'
activities and reporting the results of the committee's activities to the
Board of Directors. The independent public accountants have met with the Audit
Committee, with and without the presence of management representatives, to
discuss the results of their audit work and their comments on the adequacy of
internal accounting controls, and the quality of financial reporting. The
independent public accountants have direct access to the Audit Committee.
 
Sunil Wadhwani
Co-Chairman, Chief Executive Officer and Director
 
Jeffrey A. McCandless
Vice President, Finance and Chief Financial Officer
 
March 10, 1999
 
                                      25
<PAGE>
 
                              MASTECH CORPORATION
 
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
                                                                           Page
                                                                           ----
<S>                                                                        <C>
Report of Independent Public Accountants..................................  27
Consolidated Balance Sheets as of December 31, 1998 and 1997..............  28
Consolidated Statements of Income for the years ended December 31, 1998,
 1997 and 1996............................................................  29
Consolidated Statements of Shareholders' Equity for the years ended
 December 31, 1998, 1997 and 1996.........................................  30
Consolidated Statements of Cash Flows for the years ended December 31,
 1998, 1997 and 1996......................................................  31
Notes to Consolidated Financial Statements................................  32
</TABLE>
 
                                       26
<PAGE>
 
                   REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
 
To the Board of Directors and Shareholders
of Mastech Corporation:
 
  We have audited the accompanying consolidated balance sheets of Mastech
Corporation (a Pennsylvania corporation) and subsidiaries as of December 31,
1998 and 1997, and the related consolidated statements of income,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
 
  We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
 
  In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Mastech Corporation and
subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
 
ARTHUR ANDERSEN LLP
 
Pittsburgh, Pennsylvania,
February 9, 1999
 
                                      27
<PAGE>
 
                              MASTECH CORPORATION
 
                          CONSOLIDATED BALANCE SHEETS
                             (dollars in thousands)
<TABLE>
<CAPTION>
                                                              December 31,
                                                            ------------------
                                                              1998      1997
                                                            --------  --------
<S>                                                         <C>       <C>
                          ASSETS
Current assets:
  Cash and cash equivalents (cost approximates market
   value).................................................. $ 36,455  $ 82,924
  Investments..............................................   47,153        --
  Accounts receivable, net of allowance for uncollectible
   accounts................................................   71,108    60,366
  Unbilled receivables.....................................   12,261     1,829
  Employee advances and related party advances.............    3,568     2,578
  Prepaid and other assets.................................    2,672     1,511
  Prepaid income taxes.....................................    2,218        --
  Deferred income taxes....................................    2,312     2,154
                                                            --------  --------
    Total current assets...................................  177,747   151,362
Equipment and leasehold improvements, at cost:
  Equipment................................................   18,859     9,686
  Leasehold improvements...................................    3,630     1,577
                                                            --------  --------
                                                              22,489    11,263
  Accumulated depreciation.................................   (5,661)   (2,488)
                                                            --------  --------
    Net equipment and leasehold improvements...............   16,828     8,775
                                                            --------  --------
Intangible assets, net.....................................   21,206     1,923
                                                            --------  --------
    Total assets........................................... $215,781  $162,060
                                                            ========  ========
           LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
  Revolving credit facilities.............................. $     --  $  6,905
  Accounts payable.........................................    8,326     5,319
  Accrued payroll and related costs........................   28,483    17,949
  Other accrued liabilities................................   10,024     8,083
  Deferred revenue.........................................      723       127
  Deferred income taxes....................................       --        46
  Accrued income taxes.....................................       --     2,005
                                                            --------  --------
    Total current liabilities..............................   47,556    40,434
  Other long term liabilities..............................    4,563       490
  Deferred income taxes....................................    5,455     1,710
Shareholders' equity:
  Preferred Stock, without par value: 20,000,000 shares
   authorized, 1 share and 0 shares of Series A Preferred
   Stock issued and outstanding, respectively..............       --        --
  Common Stock, par value $0.01 per share 100,000,000
   shares authorized, 49,141,079 and 48,789,800 shares
   issued and outstanding, respectively....................      491       252
  Additional paid-in capital...............................  111,119   105,375
  Retained earnings........................................   47,168    14,722
  Deferred compensation....................................       --      (258)
  Accumulated other comprehensive income...................     (571)     (665)
                                                            --------  --------
    Total shareholders' equity.............................  158,207   119,426
                                                            --------  --------
    Total liabilities and shareholders' equity............. $215,781  $162,060
                                                            ========  ========
</TABLE>
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                       28
<PAGE>
 
                              MASTECH CORPORATION
 
                       CONSOLIDATED STATEMENTS OF INCOME
                 (dollars in thousands, except per share data)
 
<TABLE>
<CAPTION>
                                                    Year Ended December 31,
                                                   ----------------------------
                                                     1998      1997      1996
                                                   --------  --------  --------
<S>                                                <C>       <C>       <C>
Revenues.......................................... $390,871  $240,448  $162,939
Cost of revenues..................................  262,178   167,685   119,268
                                                   --------  --------  --------
Gross profit......................................  128,693    72,763    43,671
Selling, general and administrative...............   74,653    46,140    29,340
Non-recurring charges.............................      258       518       875
                                                   --------  --------  --------
Income from operations............................   53,782    26,105    13,456
Interest (income) expenses, net...................   (3,321)   (1,193)      331
Merger-related expenses...........................    3,212        --        --
                                                   --------  --------  --------
Income before income taxes........................   53,891    27,298    13,125
Provision (credit) for income taxes
  Current.........................................   17,911    12,140       253
  Deferred........................................    2,548      (909)      (17)
  Termination of S-corporation status.............       --        --     3,900
                                                   --------  --------  --------
    Provision for income taxes.................... $ 20,459    11,231     4,136
                                                   --------  --------  --------
Net income........................................ $ 33,432  $ 16,067  $  8,989
                                                   ========  ========  ========
Basic earnings per common share................... $   0.68  $   0.36
                                                   ========  ========
Diluted earnings per common share................. $   0.67  $   0.35
                                                   ========  ========
</TABLE>
 
Pro Forma Information (Unaudited)
 
<TABLE>
<S>   <C>   <C>   <C>
Net income....... $8,989
Pro forma income
 taxes...........  5,291
                  ------
Pro forma net
 income.......... $3,698
                  ======
Pro forma basic
 and diluted
 earnings per
 common share.... $ 0.09
                  ======
</TABLE>
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                       29
<PAGE>
 
                              MASTECH CORPORATION
 
                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                             (dollars in thousands)
<TABLE>
<CAPTION>
                                                                                       Accumu-
                                              Series A                                  lated
                             Common Stock    Preferred                                  Other   Total
                           ---------------- ------------ Additional           Deferred Compre-  Share-   Compre-
                                       Par          Par   Paid-In   Retained  Compen-  hensive holders'  hensive
                             Shares   Value Shares Value  Capital   Earnings   sation  Income   Equity   Income
                           ---------- ----- ------ ----- ---------- --------  -------- ------- --------  -------
 <S>                       <C>        <C>   <C>    <C>   <C>        <C>       <C>      <C>     <C>       <C>
 Balance, December 31,
  1995...................  38,023,000 $198    --    $--   $     91  $ 14,342   $  --    $ (18) $ 14,613
 Amortization of deferred
  compensation...........          --   --    --     --         --        --      43       --        43
 Acquisition of minority
  interest in Scott
  Systems................          --   --    --     --         28        --      --       --        28
 Issuance of common
  stock..................   6,800,000   34    --     --     50,216    (4,644)     --       --    45,606
 Restricted stock award..     109,200    1    --     --        818        --    (819)      --        --
 Disproportionate
  dividend...............          --   --    --     --         --      (190)     --       --      (190)
 Dividends-paid by
  Quantum................          --   --    --     --         --      (363)     --       --      (363)
 Dividends...............          --   --    --     --         --   (19,045)     --       --   (19,045)
 Comprehensive income:
   Currency translation
    adjustment...........          --   --    --     --         --        --      --      (93)      (93) $   (93)
   Net income............          --   --    --     --         --     8,989      --       --     8,989    8,989
                                                                                                         -------
                                                                                                           8,896
 ------------------------------------------------------------------------------------------------------- =======
 Balance, December 31,
  1996...................  44,932,200  233    --     --     51,153      (911)   (776)    (111)   49,588
 Amortization of deferred
  compensation...........          --   --    --     --         --        --     518       --       518
 Exercise of stock
  options, includes
  effect of tax benefit
  recognized.............     257,600    1    --     --      2,814        --      --       --     2,815
 Reduction of previously
  authorized S-
  corporation dividend...          --   --    --     --        162        --      --       --       162
 Issuance of common
  stock..................   3,600,000   18    --     --     51,246        --      --       --    51,264
 Dividends-paid by
  Quantum................          --   --    --     --         --      (434)     --       --      (434)
 Comprehensive income:
   Currency translation
    adjustment...........          --   --    --     --         --        --      --     (554)     (554)    (554)
   Net income............          --   --    --     --         --    16,067      --       --    16,067   16,067
                                                                                                         -------
                                                                                                          15,513
 ------------------------------------------------------------------------------------------------------- =======
 Balance, December 31,
  1997...................  48,789,800  252    --     --    105,375    14,722    (258)    (665)  119,426
 Amortization of deferred
  compensation...........          --   --    --     --         --        --     258       --       258
 Exercise of stock
  options, includes
  effect of tax benefit
  recognized.............     351,279    2    --     --      5,482        --      --       --     5,484
 Two-for-one stock split
  effected in the form of
  a stock dividend paid
  on April 10, 1998......          --  237    --     --         --      (237)     --       --        --
 Issuance of preferred
  stock..................          --   --     1     --         --        --      --       --        --
 Non-cash merger costs...          --   --    --     --        262        --      --       --       262
 Dividends-paid by
  Quantum................          --   --    --     --         --      (749)     --       --      (749)
 Comprehensive income:
 Net unrealized gain on
  investments............          --   --    --     --         --        --      --      368       368      368
   Currency translation
    adjustment...........          --   --    --     --         --        --      --     (274)     (274)    (274)
   Net income............          --   --    --     --         --    33,432      --       --    33,432   33,432
                                                                                                         -------
                                                                                                         $33,526
 ------------------------------------------------------------------------------------------------------- =======
 Balance, 
  December 31, 1998....... 49,141,079 $491     1    $--   $111,119  $ 47,168   $  --    $(571) $158,207
 =======================================================================================================
</TABLE>
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                       30
<PAGE>
 
                              MASTECH CORPORATION
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (dollars in thousands)
 
<TABLE>
<CAPTION>
                                                    Year Ended December 31,
                                                    --------------------------
                                                      1998     1997     1996
                                                    --------  -------  -------
<S>                                                 <C>       <C>      <C>
Cash Flows From Operating Activities
Operations:
  Net income....................................... $ 33,432  $16,067  $ 8,989
  Adjustments to reconcile net income to cash:
    Depreciation and amortization..................    3,734    1,487      395
    Allowance for uncollectible accounts...........      513      540      175
    Minority interest..............................       --       --      (54)
    Deferred income taxes, net.....................    3,160   (2,061)   3,654
    Non-cash merger costs, net.....................      262       --       --
    Amortization of deferred compensation..........      258      518       43
    Amortization of bond premium...................      534       --       --
  Working capital items:
    Accounts receivable and unbilled receivables...  (15,559) (30,858)  (4,536)
    Employee and related party advances............     (990)     694   (2,338)
    Prepaid and other assets.......................   (1,027)    (541)     280
    Accounts payable...............................    2,420      356    2,940
    Accrued and other current liabilities..........    8,379   10,333    2,171
                                                    --------  -------  -------
      Net cash flows from operating activities.....   35,116   (3,465)  11,719
                                                    --------  -------  -------
Cash Flows From Investing Activities
  Additions to equipment and leasehold
   improvements....................................  (11,147)  (5,897)  (3,102)
  Purchases of investments.........................  (74,965)      --       --
  Sales of investments.............................   27,646       --       --
  Acquisitions, net of cash acquired...............  (19,218)  (2,154)      28
                                                    --------  -------  -------
      Net cash flows from investing activities.....  (77,684)  (8,051)  (3,074)
                                                    --------  -------  -------
Cash Flows From Financing Activities
  Net borrowings (payments) under revolving credit
   facilities......................................   (8,362)   1,121    2,480
  Net proceeds from issuance of Common Stock.......       --   51,264   45,606
  Proceeds from exercise of stock options..........    5,484    2,815       --
  Dividends paid...................................     (749)  (6,772) (13,098)
                                                    --------  -------  -------
      Net cash flows from financing activities.....   (3,627)  48,428   34,988
                                                    --------  -------  -------
Effect of currency translation to cash.............     (274)    (554)     (93)
                                                    --------  -------  -------
Net change in cash and cash equivalents............  (46,469)  36,358   43,540
Cash and cash equivalents, beginning of period.....   82,924   46,566    3,026
                                                    --------  -------  -------
Cash and cash equivalents, end of period........... $ 36,455  $82,924  $46,566
                                                    ========  =======  =======
Non-Cash Investing and Financing Activities
  Unrealized gain on investments................... $    368  $    --  $    --
                                                    ========  =======  =======
Supplemental Disclosure
  Cash payments for interest....................... $    300  $   757  $   511
                                                    ========  =======  =======
  Cash payments for income taxes................... $ 16,148  $ 9,170  $   376
                                                    ========  =======  =======
</TABLE>
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                       31
<PAGE>
 
                              MASTECH CORPORATION
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
1. Operations
 
  In conjunction with the closing of its initial public offering on December
16, 1996, Mastech Systems Corporation, the entity through which the business
of the Company had been conducted since its inception in July 1986, became an
indirect, wholly owned subsidiary of Mastech Corporation ("Mastech" or the
"Company"), which was incorporated in Pennsylvania on November 12, 1996.
 
  Mastech is a worldwide provider of information technology ("IT") services to
large and medium-sized organizations. Mastech provides its clients with a
single source for a broad range of applications solutions and services,
including client/server design and development, software modernization
services, enterprise resource planning ("ERP") package implementation
services, E-Business solutions, customer interaction management, applications
maintenance outsourcing and Year 2000 services. These services are provided in
a variety of computing environments and use leading technologies, including
client/server architectures, object-oriented programming languages and tools,
distributed database management systems and the latest networking and
communications technologies. To enhance its services, Mastech has formed
business alliances with leading software companies such as Oracle, PeopleSoft,
SAP, Siebel and Genesys. In addition, the Company has developed its own
proprietary methodologies and tools, under the name SmartAPPS, that enhance
the productivity of the Company's Year 2000 and other services.
 
  Mascot Systems Pvt, Ltd. ("Mascot"), a wholly owned foreign subsidiary, was
acquired upon the closing of the Company's initial public offering. During
1997, Mascot operated one offshore software development center in Bangalore,
India, and during 1998 opened two additional centers in the cities of Pune and
Madras, India. Mascot's current operations serve as Mastech's single source
for offshore software development. Scott provides IT professional recruiting
and training services. As of December 31, 1997, all of Mascot, SWAT and
Scott's revenues were derived from services provided to Mastech Systems.
 
  Financial results for the years ended December 31, 1997 and 1996 have been
restated to reflect the acquisition of Quantum in a business combination that
was accounted for as a pooling of interests.
 
2. Stock Split
 
  On March 17, 1998, the Company's Board of Directors declared a two-for-one
stock split that was effected in the form of a stock dividend paid on April
10, 1998 to shareholders of record on March 27, 1998. All share and per share
amounts included in the Company's consolidated financial statements have been
restated to reflect the stock split for all periods presented except where
otherwise noted.
 
3. Summary of Significant Accounting Policies
 
  The accompanying Consolidated Financial Statements reflect the application
of the following significant accounting policies:
 
 (a) Principles of Consolidation
 
  The Consolidated Financial Statements include the accounts of the Company
and its wholly owned subsidiaries. All material intercompany transactions and
balances have been eliminated in consolidation.
 
 (b) Cash and Cash Equivalents
 
  Cash and Cash Equivalents are defined as cash and short-term investments
with maturities of three months or less at the time of acquisition.
 
 (c) Investments
 
  The Company's short-term investments are classified as available-for-sale as
defined by Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities"
 
                                      32
<PAGE>
 
                              MASTECH CORPORATION
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
 
("SFAS No. 115"). These investments consist of investment grade municipal
bonds and are stated at estimated fair value based upon market quotes.
 
 (d) Accounts Receivable
 
  The Company extends credit to clients based upon management's assessment of
their creditworthiness. Substantially all of the Company's revenues (and the
resulting accounts receivable) are from large companies, major systems
integrators and governmental agencies. The allowance for uncollectible
accounts was approximately $1,728,000, $1,215,000 and $675,000 as of December
31, 1998, 1997 and 1996, respectively.
 
  Unbilled receivables represent amounts recognized as revenues for the
periods presented based on services performed under the terms of client
contracts that will be invoiced in subsequent periods.
 
 (e) Revenue Recognition
 
  The Company recognizes revenue on time-and-materials contracts as the
services are performed for clients. Revenues on fixed-price contracts are
recognized using the percentage of completion method. Percentage of completion
is determined by relating the actual cost of work performed to date to the
estimated total cost for each contract. If the estimate indicates a loss on a
particular contract, a provision is made for the entire estimated loss without
reference to the percentage of completion. Changes in job performance,
conditions and estimated profitability may result in revisions to costs and
revenues and are recognized in the period in which the changes are identified.
 
 (f) Hedging
 
  The Company selectively uses foreign exchange contracts to hedge foreign
exchange exposure on certain intercompany debt. Gains and losses on the
foreign exchange contracts are recognized under hedge accounting in
Shareholders' Equity as Currency Translation Adjustment. Such gains and losses
are essentially offset in Currency Translation Adjustment by gains or losses
on translation of the related debt.
 
 (g) Depreciation and Amortization
 
  The Company provides for depreciation using the straight-line method in
amounts which allocate the costs of equipment over their estimated useful
lives of three to seven years, and leasehold improvements over the shorter of
the life of the improvement or of the underlying lease term.
 
  Intangible assets, which include the excess of purchase price and related
costs over the value of the net assets acquired, are amortized using the
straight-line method over periods ranging from five to thirty years. The
Company assesses the recoverability of goodwill by determining whether the
amortization of the goodwill balance over its remaining life can be recovered
through undiscounted future operating cash flows. The Company believes that
the carrying amount of these intangible assets will be realizable over their
respective amortization periods. Accumulated amortization was approximately
$258,000 and $11,000 for 1998 and 1997, respectively. Annual amortization
expense for 1998 and 1997 was approximately $247,000 and $11,000,
respectively.
 
 (h) Currency Translation Adjustment
 
  The financial statements of foreign subsidiaries are translated using the
exchange rate in effect at year-end for balance sheet accounts and the average
exchange rate in effect during the year for revenue and expense accounts.
Translation gains and losses are excluded from the consolidated income
statements and are instead reported as the currency translation adjustment
component of shareholders' equity.
 
                                      33
<PAGE>
 
                              MASTECH CORPORATION
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
 
 
  The functional currency of international offices and foreign subsidiaries is
the currency of the country in which the office or subsidiary is located.
Revenues of the Company are billed in the currency of the country in which the
customer is located. Translation gains and losses arising from differences
between the functional and billing currencies are recognized in the
consolidated income statements.
 
  Mastech Systems has loans outstanding from Mascot Systems, which have been
eliminated in the accompanying consolidated balance sheets as of December 31,
1998 and 1997. The terms of the loans provide for the scheduled repayment of
principal and accrued interest in fiscal years 2001 through 2005. However, the
Company considers these loans permanently reinvested, and therefore has
recorded the related foreign transaction gains and losses in the currency
translation adjustment as of December 31, 1998.
 
 (i) Income Taxes
 
  The Company provides for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
No. 109"). Deferred income taxes are provided for the temporary differences
between the financial reporting basis and the tax basis of the Company's
assets and liabilities.
 
  Prior to its initial public offering, the Company elected to be taxed under
Subchapter S of the Internal Revenue Code of 1986, as amended ("S-
corporation") for income tax purposes. Accordingly, the income of the Company
was reported on the individual income tax returns of its shareholders.
Therefore, the financial statements do not include a provision for income
taxes related to income prior to the closing of the initial public offering.
 
  The Company's S-corporation status terminated in connection with the
Company's initial public offering, thereby subjecting the Company's income to
federal and state income taxes at the corporate level. Due to temporary
differences in recognition of revenues and expenses at the time of the initial
public offering, income for financial reporting purposes exceeded income for
income tax purposes. Accordingly, the application of the provisions of SFAS
No. 109 resulted in the recognition of deferred tax liabilities (and a
corresponding one-time charge to expense) of $3.9 million as of the date the
S-corporation was terminated. The majority of this tax provision will be paid
through the year 2000.
 
  In the recent past, the government of India has provided incentives, in the
form of tax holidays, to encourage foreign investment. The Company's operation
in India was eligible for a tax holiday for a five-year period beginning in
1997.
 
 (j) Use of Estimates in the Preparation of Financial Statements
 
  The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
 
 (k) Financial Instruments
 
  The fair values and carrying amounts of the Company's financial instruments,
primarily accounts receivable and payable, are approximately equivalent. The
financial instruments are classified as current and will be liquidated within
the next operating cycle.
 
 (l) Pro Forma Information (Unaudited):
 
  The pro forma adjustments for income taxes included in the accompanying
consolidated income statements are based upon the statutory rates in effect
for C-corporations during the periods presented.
 
                                      34
<PAGE>
 
                              MASTECH CORPORATION
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
 
 
 (m) Reclassifications
 
  Certain reclassifications have been made to the Company's 1997 and 1996
financial statements to conform to current year presentation.
 
4. Investments
 
  Short-term investments, classified as available-for-sale, consist of
investment grade municipal bonds at December 31, 1998 with an amortized cost
of $46,785,000, unrealized gain of $368,000 and market value of $47,153,000.
The value of securities with a contractual maturity within one year at
December 31, 1998 was $28,271,000. The value of securities with a contractual
maturity at December 31, 1998 over one year and less than three years was
$18,882,000. Gross realized gains on sales of securities in 1998 was
immaterial.
 
5. Hedging Activities
 
  The Company selectively uses foreign exchange contracts to hedge foreign
exchange exposure on certain intercompany debt. At December 31, 1998, the
Company held one foreign exchange contract, which was the far end of a
Canadian dollar swap, maturing on March 31, 1999. The outstanding contract is
for the sale by the Company of 7 million Canadian dollars at 1.54875 (US
$4,519,774).
 
6. Income Taxes
 
  The components of the provision (benefit) for income taxes for the years
ended December 31, 1998, 1997 and 1996 are as follows:
 
<TABLE>
<CAPTION>
                                                             December 31,
                                                        -----------------------
                                                         1998    1997     1996
                                                        ------- -------  ------
                                                        (dollars in thousands)
<S>                                                     <C>     <C>      <C>
Current provision:
  Federal.............................................. $13,806 $ 9,312  $  216
  State................................................   1,869   1,577      --
  Foreign..............................................   2,236   1,251      37
                                                        ------- -------  ------
    Total current provision............................  17,911  12,140     253
Deferred provision (benefit):
  Federal..............................................   2,057    (700)    (17)
  State................................................     491    (155)     --
  Foreign..............................................      --     (54)     --
  Termination of S-corporation status..................      --      --   3,900
                                                        ------- -------  ------
    Total deferred provision (benefit).................   2,548    (909)  3,883
                                                        ------- -------  ------
Total provision for income taxes....................... $20,459 $11,231  $4,136
                                                        ======= =======  ======
</TABLE>
 
  The reconciliation of income taxes computed using the statutory U.S. income
tax rate and the provision for income taxes for the years ended December 31,
1998 and 1997 follows:
 
<TABLE>
<CAPTION>
                                        December 31, 1998   December 31, 1997
                                        ------------------- -------------------
                                               (dollars in thousands)
<S>                                     <C>        <C>      <C>        <C>
Income taxes computed at the federal
 statutory rate........................ $   18,862    35.0% $    9,554    35.0%
State income taxes, net of federal
 benefit...............................      1,534     2.8         924     3.4
Other, net.............................         63     0.2         753     2.7
                                        ---------- -------  ---------- -------
Provision for income taxes............. $   20,459    38.0% $   11,231    41.1%
                                        ========== =======  ========== =======
</TABLE>
 
                                      35
<PAGE>
 
                              MASTECH CORPORATION
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
 
 
  The Company's S-corporation status terminated in connection with the
Company's initial public offering, thereby subjecting the Company's income to
federal and state income taxes at the corporate level.
 
  Prior to the initial public offering, the Company elected Subchapter S-
corporation status for income tax purposes. Accordingly, the income of the
Company was reported on the individual income tax returns of its shareholders.
The financial statements, therefore, do not include a provision for income
taxes prior to the closing of the initial public offering.
 
  The reconciliation of income taxes computed using the statutory U.S. income
tax rate and the provision for income taxes for the 15-day C-corporation
period ended December 31, 1996 follows. Due to the S- to C-corporation
conversion, a reconciliation of the effective tax rate expressed in
percentages is not meaningful for 1996.
 
<TABLE>
<CAPTION>
                                                           December 31, 1996
                                                         ----------------------
                                                         (dollars in thousands)
<S>                                                      <C>
C-corporation income before taxes for the 15 day period
 ended December 31, 1996................................         $  413
Net taxable temporary differences.......................              4
Current portion of S-corporation deferred revenue.......            123
                                                                 ------
Book taxable income as a C-corporation..................            540
Income taxes computed at the federal statutory rate.....            216
Provision for change in tax status to C-corporation.....          3,900
Other, net..............................................             20
                                                                 ------
Provision for income taxes..............................         $4,136
                                                                 ======
</TABLE>
 
  The components of the deferred tax assets and liabilities are as follows:
 
<TABLE>
<CAPTION>
                                                           December 31,
                                                      ------------------------
                                                           1998         1997
                                                      -----------  -----------
                                                      (dollars in thousands)
<S>                                                   <C>          <C>
Deferred tax assets
  Allowance for doubtful accounts and employee
   advances.......................................... $      (356) $      (304)
  Accrued vacation...................................      (1,088)        (418)
  Foreign tax credit carryforward....................         (31)        (225)
  Reserve for contract costs.........................        (653)        (692)
  Reserve for Canadian employment taxes..............        (915)        (979)
  Accrued pension costs..............................        (187)        (196)
  Other..............................................        (660)        (615)
                                                      -----------  -----------
                                                      $    (3,890) $    (3,429)
                                                      ===========  ===========
Deferred tax liabilities
  S-corporation deferred revenue..................... $     1,200  $     2,345
  Compensation for IMIS employees....................       3,372           --
  Section 481(a) adjustments.........................         381           --
  Other..............................................       2,080          686
                                                      -----------  -----------
Total deferred tax liability......................... $     7,033  $     3,031
                                                      ===========  ===========
Net current (asset) liability........................ $    (2,312) $    (2,108)
Net long-term liability..............................       5,455        1,710
                                                      -----------  -----------
                                                      $     3,143  $      (398)
                                                      ===========  ===========
</TABLE>
 
 
                                      36
<PAGE>
 
                              MASTECH CORPORATION
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
 
  The foreign tax credit carryforwards of $31,000 recognized as of December
31, 1998 expire during fiscal year 2002.
 
7. Revolving Credit Facility
 
  The Company had a revolving credit facility with PNC Bank, National
Association. Borrowings under this arrangement were unsecured, were limited to
$15.0 million, bore interest at LIBOR plus 1.0% or the prime rate and were
payable upon demand. There were no borrowings outstanding under this
arrangement as of December 31, 1996. Average outstanding borrowings under this
arrangement were $535,000 and $1.4 million for the years ended December 31,
1997 and 1996, respectively.
 
  Effective May 30, 1997, the Company replaced the above mentioned revolving
credit facility with a $25.0 million revolving credit facility with PNC Bank,
National Association (the "Facility"). The Facility bears interest at a rate
equal to LIBOR plus 1.0% or prime, at the Company's option, and borrowings are
unsecured. The Facility contains certain restrictive covenants and financial
ratio requirements which would limit distributions to shareholders and
additional borrowings. There were no borrowings outstanding under this
arrangement as of December 31, 1997. For the year ended December 31, 1997,
average outstanding borrowings were approximately $489,000 and the maximum
outstanding borrowings were $4.0 million. The weighted-average interest rate
for the year ended December 31, 1997 was 8.5%.
 
  Effective December 3, 1998, the Company replaced the aforementioned Facility
with a $75.0 million revolving credit facility with PNC Bank, National
Association ("the Credit Facility"). This Credit Facility bears interest at a
rate per annum equal to a base rate (which is adjusted by a change in the
prime rate or the Federal Funds Effective Rate at the Company's option) that
is equal to the sum of the Euro-rate plus an applicable Euro-rate margin. The
Credit Facility contains certain restrictive covenants and financial ratio
requirements which would limit distributions to shareholders and additional
borrowings. There were no borrowings outstanding under this arrangement as of
December 31, 1998. For the year ended December 31, 1998, average outstanding
borrowings were approximately $161,000 and the maximum outstanding borrowings
were $4.0 million. The weighted-average interest rate for the year ended
December 31, 1998 was 8.5%.
 
  During the first quarter of 1998, Mascot Systems had aggregate borrowings of
approximately $1.7 million outstanding under revolving credit agreements with
ICICI Banking Corporation Limited and IndusInd Bank Limited, both of India.
Interest rates charged on these borrowings ranged from 18.75% to 19.25% per
year. These borrowings were repaid in full by the Company in May 1998.
 
  The Company assumed $6.9 million of borrowings outstanding under a revolving
credit agreement with the Bank of Montreal related to the Quantum acquisition.
This amount was repaid in full as of June 30, 1998.
 
8. Related Party Transactions
 
  As an S-corporation, the net income of the Company was attributed, for
federal (and some state) income tax purposes, directly to the Company's
shareholders rather than to the Company. During 1997 and 1996, the Company had
from time to time paid the corresponding income taxes due on these amounts on
behalf of the controlling shareholders in the form of interest-free advances
which were later repaid. The highest aggregate amounts of advances outstanding
to one of the controlling shareholders and his Qualified Subchapter S Trust
during 1998, 1997 and 1996 were approximately $87,000, $96,000 and $1,682,000,
respectively. The highest aggregate amounts of advances outstanding to the
other controlling shareholder and his Qualified Subchapter S Trust during
1998, 1997 and 1996 were approximately $118,000, $158,000 and $1,682,000,
respectively.
 
 
                                      37
<PAGE>
 
                              MASTECH CORPORATION
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
 
  Mascot Systems leases from the controlling shareholders the office space for
the offshore software development facilities in Bangalore, India. The
acquisition of the real estate and the construction of this office building
(but not the buildout of the office space) was financed entirely by the
controlling shareholders out of personal funds. Specifically, Mascot Systems
leases approximately 4,500 square feet of office space on one floor of an
office building located in Bangalore, which is owned by the controlling
shareholders. The lease has a ten-year term expiring in February 2008, with a
rent revision clause every March. The rent is approximately $29,000 per year.
Mascot Systems also leases a 32,500-square-foot office building located in
Bangalore from the controlling shareholders. This lease has a ten-year term
expiring in October 2006, and the annual rent is approximately $95,000. The
Offshore Development Center at Chennai was partly functional during 1998 and
fully functional beginning January 1, 1999. The lease agreement effective for
a ten-year period effective March 1998 and expiring February 2008 has an
annual rent of $449,000. The rental agreement may be revised each March. Since
the facility was partly occupied during 1998, rent paid to the controlling
shareholders was $118,000. Mascot Systems has also rented approximately 9,000
square feet of space for its facilities located in Bangalore and Chennai for
which rent in the amount of $9,000 was paid during 1998.
 
  Scott Systems leases, for its training facilities, approximately 2,100
square feet of office space on one floor of an office building located in
Mumbai (Bombay, India). The leased space is divided into five separately owned
suites owned individually by the controlling shareholders. The lease expires
in March 2003, and the aggregate rent is approximately $20,000 per year. Scott
Systems also leases further office space of approximately 900 square feet on
another floor in the same office building, which is owned by the controlling
shareholders. This lease has a term that expires in August 2007, and the rent
is $6,000 per year. Scott Systems also leases a portion of the Pune facility
from the controlling shareholders. This lease covers 7,500 square feet of
office space and expires in August 2007. The rent is approximately $18,000 per
year.
 
9. Commitments and Contingencies
 
  The Company rents certain office facilities and equipment under
noncancelable operating leases that provide for the following future minimum
rental payments as of December 31, 1998:
 
<TABLE>
<CAPTION>
   Period ending
   December 31,                                                   Amount
   -------------                                          ----------------------
                                                          (dollars in thousands)
   <S>                                                    <C>
    1999.................................................         $4,010
    2000.................................................          3,582
    2001.................................................          2,471
    2002.................................................          1,466
    Thereafter...........................................          4,077
</TABLE>
 
  Rental expense was approximately $3,210,000, $1,984,000 and $1,448,000 for
the years ended December 31, 1998, 1997 and 1996, respectively.
 
  The Company has employment agreements with its controlling shareholders and
certain of its executive officers which provide generally for specified
minimum salaries and bonuses based upon the Company's performance.
 
  The majority of the Company's projects with customers, including those
related to Year 2000 conversion, generally provide that the Company will
supply consultants to perform under the customer's supervision. At this time,
the Company is unable to quantify the potential risk to the Company related to
Year 2000 conversions from future claims. Nonetheless, management does not
believe that claims that may arise as a result of the above will have a
significant impact on either the financial position or the results of
operations of the Company.
 
                                      38
<PAGE>
 
                              MASTECH CORPORATION
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
 
 
  The Company is a party to several "preferred vendor" contracts and is
seeking additional similar contracts in order to obtain new or additional
business from large or medium-sized clients. While these contracts are
expected to generate higher volumes, they generally result in lower margins.
Although the Company attempts to lower costs to maintain margins, there can be
no assurance that the Company will be able to sustain margins on such
contracts. In addition, the failure to be designated a preferred vendor, or
the loss of such status, may preclude the Company from providing services to
existing or potential clients, except as a subcontractor. Nonetheless,
management does not believe that claims that may arise as a result of the
above will have a significant impact on either the financial position or the
results of operations of the Company.
 
10. Employee Benefit Plans
 
  The Company sponsors a 401(k) benefit plan. Eligible employees, as defined
in the plan, may contribute up to 15% of eligible compensation, as defined.
The Company does not currently contribute to this plan.
 
11. Non-recurring Charges
 
  In October 1996, the Company entered into an agreement with an executive
pursuant to which the Company agreed to pay this individual, as compensation
for past services, an amount equal to the value of 218,400 shares of Common
Stock at the initial public offering price of $7.50 per share. Both of these
numbers have been adjusted to reflect the two-for-one stock split. One-half of
this payment was made in cash, at the election of the executive, on December
16, 1996. The remaining half of this obligation was satisfied on December 16,
1996 via the issuance of 109,200 shares of restricted Common Stock, as
described in Note 12. The Company has reflected the cash payment along with
the applicable tax withholdings as a non-recurring charge in the accompanying
consolidated statements of income for the year ended December 31, 1996.
 
  For the years ended December 31, 1997 and 1998, the Company has reflected
the amortization of deferred compensation for this same executive as a non-
recurring charge in the accompanying consolidated statements of income.
 
  In connection with the acquisition of Quantum, $3.2 million of merger-
related costs and expenses (primarily severance, legal and accounting costs)
were incurred and were charged to expense in the second quarter of 1998. As of
December 31, 1998, $245,000 remains and will be paid during 1999.
 
12. Stock-Based Compensation and Restricted Stock Award
 
  Effective December 16, 1996, the Company adopted the 1996 Stock Incentive
Plan (the "Plan") for directors, executive management and key personnel.
Effective February 1, 1999, the Company adopted the Second Amended and
Restated 1996 Stock Incentive Plan (the "Amended Plan") for directors,
executive management and key personnel. The Amended Plan provides that up to
15% of the number of outstanding shares of the Company on each December 31
beginning on December 31, 1998 shall be available for issuance under the
Amended Plan. As of December 31, 1998, there were 3,605,286 shares of Common
Stock available for issuance under the Amended Plan. The Company accounts for
the Plan under Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees." Had compensation costs for the Plan been
determined consistent with Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"), net income
and basic and diluted earnings per share for the year ended December 31, 1998
would have been reduced by $3.5 million, or $0.07 per share. For the year
ended December 31, 1997, net income and basic and diluted earnings per share
would have been reduced by $1.3 million, or $0.03 per share. For the year
ended December 31, 1996, net income would have been reduced by $24,000 and
there would have been no impact on pro forma basic and diluted earnings per
common share for the same period.
 
 
                                      39
<PAGE>
 
                              MASTECH CORPORATION
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
 
  During 1998, 1997 and 1996, options covering a total of 1,703,873 shares,
820,100 shares and 1,691,100 shares, respectively, of Common Stock were granted
under the Plan. Options expire ten years from the date of grant or earlier if
an option holder ceases to be employed by the Company for any reason. A summary
of stock option activity follows:
 
<TABLE>
<CAPTION>
                                                                Weighted Average
                                                       Options   Exercise Price
                                                      --------- ----------------
<S>                                                   <C>       <C>
1998
Options outstanding, beginning of period............. 2,134,600      $ 8.37
Granted.............................................. 1,703,873       19.47
Exercised............................................   351,279        8.76
Lapsed and forfeited.................................   330,198       11.06
                                                      ---------
Options outstanding, end of period................... 3,156,996      $14.25
                                                      =========      ======
Options exercisable, end of period...................   412,828      $ 9.11
                                                      =========      ======
Available for future grant........................... 3,605,286
                                                      =========
1997
Options outstanding, beginning of period............. 1,691,100      $ 7.50
Granted..............................................   820,100        9.76
Exercised............................................   257,600        7.50
Lapsed and forfeited.................................   119,000        7.50
                                                      ---------
Options outstanding, end of period................... 2,134,600      $ 8.37
                                                      =========      ======
Options exercisable, end of period...................   212,064      $ 7.50
                                                      =========      ======
Available for future grant........................... 4,978,961
                                                      =========
1996
Options outstanding, beginning of period.............        --          --
Granted.............................................. 1,691,100      $ 7.50
Exercised............................................        --          --
Lapsed and forfeited.................................        --          --
                                                      ---------
Options outstanding, end of period................... 1,691,100      $ 7.50
                                                      =========      ======
Options exercisable, end of period...................        --          --
                                                      =========      ======
Available for future grant........................... 5,680,061
                                                      =========
</TABLE>
 
 
                                       40
<PAGE>
 
                              MASTECH CORPORATION
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
 
Stock options outstanding at December 31, 1998
 
<TABLE>
<CAPTION>
                Options Outstanding                                 Options Exercisable
---------------------------------------------------- -------------------------------------------------
                                Weighted Average                                  Weighted Average
Weighted Average                   Remaining         Weighted Average                Remaining
 Exercise Price    Options  Contractual Life (Years)  Exercise Price  Options Contractual Life (Years)
----------------  --------- ------------------------ ---------------- ------- ------------------------
<S>               <C>       <C>                      <C>              <C>     <C>
     $ 7.50       1,020,257           7.96                $ 7.50      292,258           7.96
       9.56         370,000           7.33                  9.98       64,834           7.33
      15.80         619,166           8.96                 15.26       42,736           8.86
      19.26         598,573           9.17                 19.72       13,000           9.46
      22.37         490,000           9.80                    --           --             --
      25.84          59,000           9.54                    --           --             --
                  ---------                                           -------
     $14.25       3,156,996           8.63                $ 9.80      412,828           8.04
                  =========           ====                            =======           ====
</TABLE>
 
Stock options outstanding at December 31, 1997
 
<TABLE>
<CAPTION>
                Options Outstanding                                 Options Exercisable
---------------------------------------------------- -------------------------------------------------
                                Weighted Average                                  Weighted Average
Weighted Average                   Remaining         Weighted Average                Remaining
 Exercise Price    Options  Contractual Life (Years)  Exercise Price  Options Contractual Life (Years)
----------------  --------- ------------------------ ---------------- ------- ------------------------
<S>               <C>       <C>                      <C>              <C>     <C>
     $ 7.50       1,407,600           9.24                $7.50       212,064           9.24
       8.82         560,000           9.62                   --            --             --
      14.21         167,000           9.91                   --            --             --
                  ---------                                           -------
     $ 8.37       2,134,600           9.39                $7.50       212,064           9.24
                  =========           ====                            =======           ====
</TABLE>
 
Stock options outstanding at December 31, 1996
 
<TABLE>
<CAPTION>
                Options Outstanding                                 Options Exercisable
---------------------------------------------------- -------------------------------------------------
                                Weighted Average                                  Weighted Average
Weighted Average                   Remaining         Weighted Average                Remaining
 Exercise Price    Options  Contractual Life (Years)  Exercise Price  Options Contractual Life (Years)
----------------  --------- ------------------------ ---------------- ------- ------------------------
<S>               <C>       <C>                      <C>              <C>     <C>
     $7.50        1,691,100           9.96                  --           --              --
                  =========           ====                              ===             ===
</TABLE>
 
                                       41
<PAGE>
 
                              MASTECH CORPORATION
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
 
 
<TABLE>
<CAPTION>
                                                                          Stock
                                                                          Option
Summary of Stock Options                                                  Price
------------------------                                                  ------
<S>                                                                       <C>
Weighted average fair value of options granted during 1998*.............. $9.68
                                                                          =====
Weighted average fair value of options granted during 1997*.............. $2.60
                                                                          =====
Weighted average fair value of options granted during 1996*.............. $2.93
                                                                          =====
</TABLE>
--------
*The fair value of each option granted is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions:
 
<TABLE>
<CAPTION>
                                                          1998    1997    1996
                                                         ------- ------- -------
<S>                                                      <C>     <C>     <C>
Risk free interest rate.................................    5.6%    6.5%    6.2%
Expected dividend yield.................................    0.0%    0.0%    0.0%
Expected life of options................................ 5 years 5 years 6 years
Expected volatility rate................................   50.0%   33.0%   24.5%
</TABLE>
 
  Effective December 16, 1996, the Company entered into an employment
agreement with an executive that included the granting of 109,200 shares of
restricted Common Stock. During the restricted period (from December 16, 1996
to June 30, 1998), the restricted stock vested ratably and daily. The
agreement provides for partial awards and forfeitures under various
circumstances. At December 31, 1998 and 1997, the Company's consolidated
balance sheet reflects deferred compensation of $0 and $258,000, respectively,
related to this award, as an offset to shareholders' equity. Compensation
expense of $258,000, $518,000 and $43,000 related to the vesting of restricted
shares during 1998, 1997 and 1996, respectively, has been recorded in the
Company's consolidated income statement.
 
13. Earnings per Common Share
 
  In February 1997, the FASB issued Statement of Financial Accounting
Standards No. 128, "Earnings per Share" ("SFAS No. 128"), which establishes
new standards for computing and presenting earnings per share. SFAS No. 128 is
effective for financial statements issued for periods ending after December
15, 1997, including interim periods. The Company adopted SFAS No. 128 during
1997. Earnings per share for the pro forma periods were not impacted by the
adoption of SFAS No. 128.
 
  Basic pro forma net income per common share and earnings per common share
are calculated by dividing pro forma net income and net income, respectively,
by the weighted average number of common shares outstanding during the year.
Diluted pro forma net income per common share and earnings per common share
are calculated by dividing pro forma net income and net income, respectively,
by the weighted average number of shares of common stock outstanding adjusted
for the assumed conversion of all dilutive securities.
 
  The 1996 diluted shares outstanding, as calculated below, also includes
393,462 (pre-split) common shares, which represents the number of shares, when
multiplied by the initial public offering price, would have been sufficient to
replace the capital in excess of earnings withdrawn as dividends during the
period.
 
                                      42
<PAGE>
 
                              MASTECH CORPORATION
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
 
 
<TABLE>
<CAPTION>
                                            Year Ended December 31,
                                -----------------------------------------------
                                        1998            1997            1996
                                --------------- --------------- ---------------
                                 (dollars in thousands, except per share data)
<S>                             <C>             <C>             <C>
Basic earnings per share
  Net income...................         $33,432         $16,067          $3,698
Divided by:
  Weighted average common
   shares......................      48,996,895      45,250,620      39,194,023
                                =============== =============== ===============
Basic earnings per share.......           $0.68           $0.36           $0.09
                                =============== =============== ===============
Diluted earnings per share
  Net income...................         $33,432         $16,067          $3,698
Divided by the sum of:
  Weighted average common
   shares......................      48,996,895      45,250,620      39,194,023
  Dilutive effect of common
   stock equivalents...........         833,539         469,506           6,400
                                --------------- --------------- ---------------
  Diluted average common
   shares......................      49,830,434      45,720,126      39,200,423
                                =============== =============== ===============
Diluted earnings per share.....           $0.67           $0.35           $0.09
                                =============== =============== ===============
</TABLE>
 
14. Business Acquisitions
 
  On October 26, 1998, the Company acquired International MIS, Inc. ("IMIS"),
a business and information technology consulting firm based in San Francisco,
California. IMIS provides the financial industry with high-level project
management and business analysis consulting services. The acquisition was
accounted for as a purchase. Operating results have been included in the
Company's consolidated financial statements since the date of acquisition, but
pro forma information has not been presented because it is immaterial.
 
  On July 1, 1998, the Company acquired privately held MC Computer Services
Pty Limited ("MCCS"), a Canberra, Australia-based information technology
services provider. MCCS provides a wide range of high-level information
technology services such as applications development, consultant services,
systems analysis and design, and project management. The acquisition has been
accounted for as a purchase. Operating results have been included in the
Company's consolidated financial statements since the date of acquisition, but
pro forma information has not been presented because it is immaterial.
 
  Related to these acquisitions, an initial payment of $15.0 million was paid
and $4.0 million was recorded as a long-term liability, which represents the
unpaid purchase price. Future payments will be made based upon a calculation
of earnings before interest, taxes, depreciation and amortization of goodwill
for the years ending 1999, 2000 and 2001. Future payments will not exceed $8.0
million under the terms of one agreement. The maximum amount of future
payments for the other agreement, will be established based upon the
calculation described above.
 
  During 1998, the Company recorded approximately $19.5 million of goodwill
related to the above acquisitions. The final amount of goodwill will be
determined upon the finalization of fair value studies of the assets acquired.
Additionally, this amount will be adjusted based upon future payments. These
two acquisitions, accounted for under the purchase method of accounting, added
$12.5 million in revenues and $9.5 million in assets for 1998.
 
  On June 1, 1998, the Company acquired all of the issued and outstanding
capital stock of Quantum Information Resources Limited ("Quantum"), a Canadian
corporation, pursuant to a business combination the terms of which were
contained in that certain Combination and Exchange Agreement dated June 1,
1998 (the
 
                                      43
<PAGE>
 
                              MASTECH CORPORATION
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
 
"Exchange Agreement"). Pursuant to the Exchange Agreement, the shareholders of
Quantum received 1,623,000 exchangeable non-voting shares of Quantum, which
are convertible into the same number of shares of the Company's Common Stock
(the "Exchangeable Shares"), and PNC Bank, National Association, received 1
share of Series A Preferred Stock, as trustee for the shareholders of Quantum,
pursuant to which such shareholders were granted the right to vote the Company
Common Stock underlying the Exchangeable Shares.
 
  Quantum provides IT services primarily in Canada and parts of the United
States. The business combination was accounted for as a pooling of interests
and, accordingly, the Company's consolidated financial statements have been
restated to include results for Quantum for all periods presented. Separate
revenues and net income, prior to the business combination, are presented in
the following table:
 
<TABLE>
<CAPTION>
                                            Five Months
                                           Ended May 31, Year Ended December 31,
                                           ------------- -----------------------
                                               1998           1997        1996
                                             --------    ----------- -----------
(dollars in thousands)
<S>                                        <C>           <C>         <C>
Revenues
  Mastech.................................   $121,298    $   195,967 $   123,400
  Quantum.................................     20,181         44,481      39,539
                                             --------    ----------- -----------
  Total...................................   $141,479    $   240,448 $   162,939
                                             ========    =========== ===========
Net income
  Mastech                                    $ 11,093    $    15,606 $     8,692
  Quantum.................................        928            461         297
                                             --------    ----------- -----------
  Total...................................   $ 12,021    $    16,067 $     8,989
                                             ========    =========== ===========
</TABLE>
 
  On December 2, 1997, the Company acquired Asia Pacific Computer Consultants
Pty Limited ("Asia Pacific"), a Sydney, Australia-based information technology
and telecommunications ("IT&T") services provider. Asia Pacific was merged
with Mastech's existing Australia operations and became a Mastech subsidiary,
Mastech Asia-Pacific. In addition to an initial payment, a contingent future
payment, if required, will be made in accordance with a calculation involving
the earnings before interest of Asia Pacific, as defined, for each of the
years ended December 31, 1998 and 1999.
 
15. S-Corporation Dividend
 
  In December 1996, the Company's Board of Directors declared an S-corporation
dividend to former S-corporation shareholders in an aggregate amount
representing the estimated amount of all undistributed earnings of the Company
taxed or taxable to its shareholders through December 16, 1996 (the "S-
corporation Dividend"). The S-corporation Dividend was recorded in the
consolidated balance sheets at December 31, 1996 in the amount of $6.5
million. The S-corporation Dividend was paid in the amount of $6.3 million in
1997, with the difference recognized as an increase in additional paid-in
capital as shown in the accompanying consolidated statements of shareholders'
equity.
 
16. Segment Reporting
 
  In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures About Segments of an Enterprise and Related Information"
("SFAS No. 131"), which requires the use of the "management approach" model
for segment reporting. The management approach model is based on the way a
company's management organizes segments within the company for making
operating decisions and assessing performance. Reportable segments are based
on products and services, geography, legal structure, management structure or
any other manner in which management segregates a company.
 
 
                                      44
<PAGE>
 
                              MASTECH CORPORATION
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
 
 
  Mastech Corporation's reportable segments are strategic business units that
offer similar services to different target markets. They are managed
separately because each business unit requires different marketing strategies.
The Company has three reportable segments: U.S. Client Services group, the
High Value Services group and the International Client Services group.
 
  The U.S. Client Services group is divided into geographic regions, each of
which is directed by a Manager or Regional Director. Each region includes
multiple new business development managers. These individuals use a
proprietary database of several thousand prospects to telemarket Mastech's
services nationally. The Company subsequently sends interested prospective
clients a written proposal providing information about the Company, its
approach and methodology, schedules, team members, pricing and terms.
 
  The U.S. Client Services group also focuses on developing national and
global relationships with major systems integrators such as EDS, IBM, KPMG,
Ernst & Young and Oracle. Mastech assists these integrators in meeting their
customers' needs by providing specialized technical expertise and
complementary capabilities such as offshore development.
 
  The High Value Services group provides IT professionals trained in ERP
implementations, E-Business consulting, network services, Year 2000 services,
in addition to managing engagements in the aforementioned services.
Additionally, this group provides services through offshore software
development centers which are connected via secure, high-speed satellite links
to the Company's headquarters and client sites. This group works directly with
the end-user clients and also partners with a wide array of software
companies, ranging from ERP to supply-chain and custom-interaction vendors,
and systems integrators on teamed implementation efforts.
 
  The International Client Services group operates through offices in nine
different countries. Each office is supervised by a Country Manager and
supported by dedicated sales personnel that sell directly to new clients using
an approach similar to the Company's U.S. sales approach. Additionally, these
offices focus on leveraging Mastech's existing relationships with its U.S.-
based multinational clients.
 
  The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. The Company evaluates segment
performance based on profit or loss from operations. The Company does not
allocate income taxes, other income or expense and non-recurring charges to
segments. In addition, the Company accounts for inter-segment sales and
transfers at current market prices.
 
  Revenues by geographic area consisted of the following:
 
<TABLE>
<CAPTION>
                                                       Year Ended December 31,
                                                      --------------------------
                                                        1998     1997     1996
(dollars in thousands)                                -------- -------- --------
<S>                                                   <C>      <C>      <C>
Revenues
  United States...................................... $283,569 $175,364 $116,514
  Canada.............................................   49,489   47,830   39,935
  Europe.............................................   26,126    8,898      329
  Pacific Rim........................................   31,687    8,356    6,161
                                                      -------- -------- --------
  Total Revenues..................................... $390,871 $240,448 $162,939
                                                      ======== ======== ========
</TABLE>
 
<TABLE>
<CAPTION>
                                                         Year Ended December 31,
                                                         -----------------------
                                                              1998        1997
                                                         ----------- -----------
<S>                                                      <C>         <C>
Total Assets
  United States.........................................    $168,276    $145,994
  Canada................................................      16,158       3,628
  Europe................................................      13,836       5,643
  Pacific Rim...........................................      17,511       6,795
                                                         ----------- -----------
  Total Assets..........................................    $215,781    $162,060
                                                         =========== ===========
</TABLE>
 
 
                                      45
<PAGE>
 
                              MASTECH CORPORATION
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
 
<TABLE>
<CAPTION>
                           U.S.              International
                          Client  High Value    Client       Corporate
                         Services Services    Services(1)  Activities(2)  Total
                         -------- ---------- ------------- ------------- --------
(dollars in thousands)
<S>                      <C>      <C>        <C>           <C>           <C>
1998
 Revenues (3)........... $159,679  $140,092     $91,100      $     --    $390,871
 Income from operations.   40,344    33,804       6,407       (26,773)     53,782
 Interest (income)
  expense...............       --        --          --        (3,321)     (3,321)
 Merger-related
  expenses..............       --        --          --         3,212       3,212
 Provision for income
  taxes.................       --        --          --        20,459      20,459
                                                                         --------
 Net income............................................................. $ 33,432
                                                                         ========
<CAPTION>
                           U.S.              International
                          Client  High Value    Client       Corporate
                         Services Services    Services(1)  Activities(2)  Total
                         -------- ---------- ------------- ------------- --------
<S>                      <C>      <C>        <C>           <C>           <C>
1997
 Revenues (3)........... $122,387   $58,961     $59,100      $     --    $240,448
 Income from operations.   28,876    10,626       4,044       (17,441)     26,105
 Interest (income)
  expense...............       --        --          --        (1,193)     (1,193)
 Provision for income
  taxes.................       --        --          --        11,231      11,231
                                                                         --------
 Net income............................................................. $ 16,067
                                                                         ========
<CAPTION>
                           U.S.              International
                          Client  High Value    Client       Corporate
                         Services Services    Services(1)  Activities(2)  Total
                         -------- ---------- ------------- ------------- --------
<S>                      <C>      <C>        <C>           <C>           <C>
1996
 Revenues (3)........... $105,488   $10,931     $46,520      $     --    $162,939
 Income from operations.   25,129      (183)      2,295       (13,785)     13,456
 Interest (income)
  expense...............       --        --          --           331         331
 Provision for income
  taxes.................       --        --          --         4,136       4,136
                                                                         --------
 Net income.............................................................    8,989
 Pro forma tax provision................................................    5,291
                                                                         --------
 Pro forma net income................................................... $  3,698
                                                                         ========
</TABLE>
--------
(1)  Income from operations for the International Client Services group
     includes certain international administrative and other operating
     expenses which are not allocated to the U.S. Client Services and High
     Value Services groups.
 
(2)  Corporate activities include general corporate expenses, eliminations of
     intersegment transactions, interest income and expense and other
     unallocated charges. The Company evaluates segments based on income from
     operations. Since certain administrative and other operating expenses
     have not been allocated to the business segments, this basis is not
     necessarily a measure computed in accordance with generally accepted
     accounting principles and it may not be comparable to other companies.
     Additionally, the Company does not allocate assets, depreciation expense
     and capital additions to the business segments.
 
(3)  A single customer, included in U.S. Client Services accounted for
     approximately 11%, 11%, and 7% of the Company's revenues for the years
     ended December 31, 1998, 1997 and 1996, respectively.
 
                                      46
<PAGE>
 
                              MASTECH CORPORATION
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
 
 
17. Quarterly Financial Information (Unaudited)
 
  The following table sets forth certain unaudited financial information for
each of the quarters indicated below and, in the opinion of management,
contains all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation thereof. All information has been restated
for pooling of interests business combinations through December 31, 1998.
 
<TABLE>
<CAPTION>
                                              Three Months Ended
                               ------------------------------------------------
                                Mar. 31,    Jun. 30,    Sept. 30,    Dec. 31,
                               ----------- ----------- ------------ -----------
                                (dollars in thousands, except per share data)
<S>                            <C>         <C>         <C>          <C>
1998
 Revenues..................... $   81,586  $   92,584  $   103,405  $   113,296
 Gross Profit.................     26,303      30,745       34,649       36,996
 Income from operations.......     10,939      12,861       14,964       15,018
 Income before income taxes...     11,611      10,380       15,699       16,201
 Provision for income taxes...      4,667       4,627        5,495        5,670
 Net income................... $    6,944  $    5,753  $    10,204  $    10,531
                               ==========  ==========  ===========  ===========
 Basic and diluted earnings
  per common share............ $     0.14  $     0.12  $      0.20  $      0.21
                               ==========  ==========  ===========  ===========
1997
 Revenues..................... $   48,339  $   55,905  $    64,209  $    71,995
 Gross Profit.................     13,581      16,277       19,737       23,168
 Income from operations.......      3,461       5,988        7,589        9,067
 Income before income taxes...      3,867       6,349        7,703        9,379
 Provision for income taxes...      1,698       2,508        3,148        3,877
 Net income................... $    2,169  $    3,841  $     4,555  $     5,502
                               ==========  ==========  ===========  ===========
 Basic and diluted earnings
  per common share............ $     0.05  $     0.08  $      0.10  $      0.12
                               ==========  ==========  ===========  ===========
</TABLE>
--------
Note: The sum of the four quarters may not equal yearly totals due to rounding
of quarterly results.
 
18. Comprehensive Income
 
  During 1998, the Company adopted FASB Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"). SFAS No.
130 establishes new rules for the reporting and display of comprehensive
income and its components. SFAS No. 130 requires companies to report all
changes in equity during a period, except those resulting from investment by
owners and distribution to owners. The adoption of SFAS No. 130 had no impact
on the Company's net income or shareholders' equity.
 
19. Subsequent Events
 
  In January 1999, the Company made the following acquisitions: (1) the Amber
Group ("Amber") an SAP services company that provides integrated consulting,
development, implementation and training; (2) Direct Resources Scotland
Limited ("Direct Resources") of Edinburgh, Scotland, an IT services firm
focusing on the financial services industry; and (3) Global Resource
Management ("GRM") of Jacksonville, Florida. GRM provides information
technology consulting and support services to large companies for mission-
critical projects.
 
  The acquisitions above had combined revenues of approximately $26.2 million
for the year ended December 31, 1998. Additionally, the assets of the above
companies as of December 31, 1998 were approximately $6.1 million.
 
                                      47
<PAGE>
 
                              MASTECH CORPORATION
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
 
 
  The Amber acquisition will be accounted for under the pooling-of-interests
method of accounting. Direct Resources and GRM will be accounted for under the
purchase method of accounting.
 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE
 
  None.
 
                                       48
<PAGE>
 
                                   PART III
 
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
 
  The information required by this item is incorporated by reference from the
information under the caption "Management and Directors" in the Company's
definitive proxy statement to be filed.
 
ITEM 11. EXECUTIVE COMPENSATION
 
  The information required by this item is incorporated by reference from the
information under the caption "Executive Compensation" in the Company's
definitive proxy statement to be filed provided that the information in such
proxy statement under the captions "Performance Graph" and "Compensation
Committee Report on Executive Compensation" should not be incorporated by
reference herein.
 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
  The information required by this item is incorporated by reference from the
information under the caption "Security Ownership of Certain Beneficial Owners
and Management" in the Company's definitive proxy statement to be filed.
 
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
  The information required by this item is incorporated by reference from the
information under the caption "Certain Transactions" in the Company's
definitive proxy statement to be filed.
 
                                      49
<PAGE>
 
                                    PART IV
 
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
 
(a)1. Financial Statements
 
  The following consolidated financial statements of the registrant and its
subsidiaries are included on pages 28 to 48 and the report of independent
public accountants is included on page 27 in this Form 10-K.
 
  Report of Independent Public Accountants.
 
  Consolidated Balance Sheets--December 31, 1998 and 1997.
 
  Consolidated Statements of Income--Years ended December 31, 1998, 1997 and
1996.
 
  Consolidated Statements of Shareholders' Equity--Years ended December 31,
1998, 1997 and 1996.
 
  Consolidated Statements of Cash Flows--Years ended December 31, 1998, 1997
and 1996.
 
  Notes to Consolidated Financial Statements
 
  2. Consolidated Financial Statement Schedules
 
  The following consolidated financial statement schedules shown below should
be read in conjunction with the consolidated financial statements on pages 28
to 48 in this Form 10-K. All other schedules are omitted because they are not
applicable or the required information is shown in the financial statements or
Notes thereto.
 
  The following items appear immediately following the signature pages:
 
  Report of Independent Public Accountants on Consolidated Financial Statement
Schedules.
 
  Financial Statement Schedules:
 
  Schedule II-Valuation and Qualifying Accounts for the three years ended
December 31, 1998.
 
  Financial Data Schedules
 
  3. Exhibits
 
  Exhibits required by Item 601 of Regulation S-K are listed in the Exhibit
Index, which is incorporated herein by reference.
 
(b)Reports on Form 8-K: Not applicable.
 
                                      50
<PAGE>
 
                                  SIGNATURES
 
  Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized on this 29th day of
March, 1999.
 
                                          Mastech Corporation
 
                                                     /s/ Sunil Wadhwani
                                          By: _________________________________
                                                       Sunil Wadhwani
                                                  Chief Executive Officer
 
                       POWER OF ATTORNEY AND SIGNATURES
 
  We, the undersigned officers and directors of Mastech Corporation, hereby
severally constitute and appoint Sunil Wadhwani, Ashok Trivedi and Jeffrey
McCandless, and each of them singly, our true and lawful attorneys, with full
power to them and each of them singly, to sign for us in our names in the
capacities indicated below, amendments to this report, and generally to do all
things in our names and on our behalf in such capacities to enable Mastech
Corporation to comply with the provisions of the Securities Exchange Act of
1934, as amended, and all requirements of the Securities and Exchange
Commission.
 
  Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacities and on the
dates indicated.
 
<TABLE>
<CAPTION>
              Signature                          Title                   Date
              ---------                          -----                   ----
 
<S>                                    <C>                        <C>
          /s/ Sunil Wadhwani           Co-Chairman, Chief           March 29, 1999
______________________________________  Executive and Director
            Sunil Wadhwani              (principal executive
                                        officer)
 
          /s/ Ashok Trivedi            Co-Chairman, President and   March 29, 1999
______________________________________  Director
            Ashok Trivedi
 
        /s/ Jeffrey McCandless         Vice President--Finance      March 29, 1999
______________________________________  (principal financial
          Jeffrey McCandless            officer)
 
          /s/ Neil M. Ebner            Corporate Controller         March 29, 1999
______________________________________  (principal accounting
            Neil M. Ebner               officer)
 
            /s/ Ed Yourdon             Director                     March 29, 1999
______________________________________
              Ed Yourdon
 
        /s/ J. Gordon Garrett          Director                     March 29, 1999
______________________________________
          J. Gordon Garrett
 
           /s/ Michel Berty            Director                     March 29, 1999
______________________________________
             Michel Berty
</TABLE>
 
                                      51
<PAGE>
 
                              MASTECH CORPORATION
                 SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
 
              For the years ended December 31, 1998, 1997 and 1996
 
<TABLE>
<CAPTION>
                                     Balance at                       Balance at
            Allowance for            beginning   Charged                 end
          Doubtful Accounts          of period  to expense Deductions of period
          -----------------          ---------- ---------- ---------- ----------
(dollars in thousands)
<S>                                  <C>        <C>        <C>        <C>
Year ended December 31, 1998........   $1,215     $1,413     $(900)     $1,728
Year ended December 31, 1997........      675      1,000      (460)      1,215
Year ended December 31, 1996........      500        300      (125)        675
</TABLE>
 
                                       52
<PAGE>
 
<TABLE>
<CAPTION>
 EXHIBIT INDEX DESCRIPTION OF EXHIBIT
 ------- ----------------------------
 
 <C>     <S>
   3.1   Articles of Incorporation of the Company are incorporated by reference
         from Exhibit 3.1 to Mastech Corporation's Registration Statement on Form
         S-1, Commission File No. 333-14169, filed on November 19, 1996.
 
   3.2   Bylaws of the Company are incorporated by reference from Exhibit 3.2 to
         Mastech Corporation's Registration Statement on Form S-1, Commission File
         No. 333-14169, filed on November 19, 1996.
 
   4.1   Form of certificate representing the Common Stock of the Company is
         incorporated by reference from Exhibit 4.1 to Mastech Corporation's
         Registration Statement on Form S-1, Commission File No. 333-14169, filed
         on November 19, 1996.
 
  10.1   Form of Employment Agreement by and between the Company and Sunil Wadhwani
         and Ashok Trivedi is incorporated by reference from Exhibit 10.1 to
         Mastech Corporation's Registration Statement on Form S-1, Commission File
         No. 333-14169, filed on November 19, 1996.*
 
  10.2   1996 Stock Incentive Plan is incorporated by reference from Exhibit 10.2
         to Mastech Corporation's Registration Statement on Form S-1, Commission
         File No. 333-14169, filed on November 19, 1996.*
 
  10.3   Amended and Restated 1996 Stock Incentive Plan is incorporated by
         reference from the Quarterly Report on Form 10-Q, File No. 000-21755 filed
         on November 16, 1998.
 
  10.4   Second Amended and Restated 1996 Stock Incentive Plan is incorporated by
         reference from Exhibit 99.1 to Mastech Corporation's Definitive Proxy
         Statement, File No. 000-21755 filed on December 30, 1998.
 
  10.5   Agreement dated October 14, 1996 between Mastech Systems Corporation
         (f/k/a Mastech Corporation) and Steven Shangold, as amended by Addendum
         dated as of November 18, 1996, is incorporated by reference from Exhibit
         10.3 to Mastech Corporation's Registration Statement on Form S-1,
         Commission File No. 333-14169, filed on November 19, 1996.*
 
  10.6   Form of Employment Agreement by and between the Company and each of its
         Executive Officers is incorporated by reference from Exhibit 10.4 to
         Mastech Corporation's Registration Statement on Form S-1, Commission File
         No. 333-14169, filed on December 16, 1996.*
 
  10.7   Shareholders Agreement by and among the Company, Sunil Wadhwani and Ashok
         Trivedi and the Joinder Agreement by Grantor Retained Annuity Trusts
         established by Messrs. Wadhwani and Trivedi are incorporated by reference
         from Exhibit 10.5 to Mastech Corporation's Registration Statement on Form
         S-1, Commission File No. 333-14169, filed on December 16, 1996.
 
  10.10  Lease Agreement dated January 15, 1995 by and between Mascot Systems
         Private Limited and Messrs. Wadhwani and Trivedi for real estate in
         Bangalore, India is incorporated by reference from Exhibit 10.10 to
         Mastech Corporation's Registration Statement on Form S-1, Commission File
         No. 333-14169, filed on November 19, 1996.
 
  10.11  Lease Agreement dated November 6, 1996 by and between Mascot Systems
         Private Limited and Messrs. Wadhwani and Trivedi for real estate in
         Bangalore, India is incorporated by reference from Exhibit 10.11 to
         Mastech Corporation's Registration Statement on Form S-1, Commission File
         No. 333-14169, filed on November 19, 1996.
 
  10.12  Lease Agreement dated January 15, 1998 by and between Mascot Systems
         Private Limited and Messrs. Wadhwani and Trivedi for real estate in
         Bangalore, India is filed herewith.
 
  10.13  Lease Agreement dated March 26, 1997 by and between Mascot Systems Private
         Limited and Messrs. Wadhwani and Trivedi for real estate in Bangalore,
         India is filed herewith.
 
</TABLE>
 
                                       53
<PAGE>
 
<TABLE>
<CAPTION>
 EXHIBIT INDEX DESCRIPTION OF EXHIBIT
 ------- ----------------------------
 
 <C>     <S>
  10.14  Lease Agreement dated January 13, 1998 by and between Mascot Systems
         Private Limited and Messrs. Wadhwani and Trivedi for real estate in
         Chennai, India is filed herewith.
 
  10.15  Lease Agreement dated April 1, 1996 by and between Scott Systems Private
         Limited and Messrs. Wadhwani and Trivedi for real estate in Bombay, India
         is incorporated by reference from Exhibit 10.12 to Mastech Corporation's
         Registration Statement on Form S-1, Commission File No. 333-4169, filed on
         November 19, 1996.
 
  10.16  Lease Agreement dated April 1, 1996 by and between Scott Systems Private
         Limited and Sunil Wadhwani for real estate in Bombay, India is
         incorporated by reference from Exhibit 10.13 to Mastech Corporation's
         Registration Statement on Form S-1, Commission File No. 333-14169, filed
         on November 19, 1996.
 
  10.17  Lease Agreement dated April 1, 1996 by and between Scott Systems Private
         Limited and Ashok Trivedi for real estate in Bombay, India is incorporated
         by reference from Exhibit 10.14 to Mastech Corporation's Registration
         Statement on Form S-1, Commission File No. 333-14169, filed on November
         19, 1996.
 
  10.18  Lease Agreement dated April 18, 1998 by and between Scott Systems Private
         Limited and Messrs. Wadhwani and Trivedi for real estate in Mumbai, India
         is filed herewith.
 
  10.19  Lease Agreement dated April 18, 1998 by and between Scott Systems Private
         Limited and Messrs. Wadhwani and Trivedi for real estate in Mumbai, India
         is filed herewith.
 
  10.20  Stock Purchase Agreement by and between the Company and Messrs. Wadhwani
         and Trivedi for their shares of Mascot Systems Private Limited
         (incorporated by reference to Exhibit 10.15 on Form S-1 of Mastech
         Corporation, Commission File No. 333-14169, filed on November 19, 1996).
 
  10.21  Agreement and Plan of Merger by and between the Company and SWAT Systems
         is incorporated by reference from Exhibit 10.15 to Mastech Corporation's
         Registration Statement on Form S-1, Commission File No. 333-14169, filed
         on November 19, 1996.
 
  10.22  Form of S-corporation Revocation, Tax Allocation and Indemnification
         Agreement is incorporated by reference from Exhibit 10.17 to Mastech
         Corporation's Registration Statement on Form S-1, Commission File No. 333-
         14169, filed on November 19, 1996.
 
  10.23  Credit Agreement dated December 3, 1998 between the Company and PNC Bank,
         National Association filed herewith.
 
  10.24  Sublease Agreement dated February 10, 1995 by and between Westinghouse
         Electric Corporation and the Company for the Company's Oakdale, PA
         headquarters, as amended by amendment dated March 20, 1996 is incorporated
         by reference from Exhibit 10.19 to Mastech Corporation's Registration
         Statement on Form S-1, Commission File No. 333-14169, filed on November
         19, 1996.
 
  10.25  Lease Agreement dated October 14, 1998 by and between Park Ridge One
         Associates and the Company for office space located in Park Ridge Office
         Center near Pittsburgh, Pennsylvania is filed herewith.
 
  10.26  Form of Capital Contribution Agreement by and among the Company, Sunil
         Wadhwani, Ashok Trivedi and their respective family trusts is incorporated
         by reference from Exhibit 10.21 to Mastech Corporation's Registration
         Statement on Form S-1, Commission File No. 333-14169, filed on December
         16, 1996.
</TABLE>
 
                                       54
<PAGE>
 
<TABLE>
<CAPTION>
 EXHIBIT INDEX DESCRIPTION OF EXHIBIT
 ------- ----------------------------
 
 <C>     <S>
  23.0   Report of Independent Public Accountants on Financial Statement Schedule
 
  23.1   Consent of Independent Public Accountants
 
  24.1   Power of Attorney (included on signature page in this report)
 
  27.1   Financial Data Schedule
 
  27.2   Restated Financial Data Schedule
 
  27.3   Restated Financial Data Schedule
</TABLE>
--------
* Management compensatory plan or arrangement
 
                                       55